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America’s long economic expansion: can it continue?

Graham Smith

Graham Smith - Market Commentator

Despite the multitude of headwinds set against it – including nine interest rate rises since 2015 – the US economy continues to motor along¹. A boom in activity last summer in the wake of US$1.5 trillion in tax cuts and big increases in federal government spending makes for challenging year-on-year comparisons, yet growth probably continued last quarter.

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All the more remarkable is how well the initial effects of Chinese trade tariffs have been absorbed. While some parts of the economy like agriculture have undoubtedly suffered and some exporting companies have reported the ill effects dropping directly to their bottom lines, the economy grew at annualised rates of 2.2% and 3.1% in the final quarter of 2018 and first quarter of this year respectively².

Positive thinking is a wonderful thing and no doubt accounts for some of this resilience. Hopes of a resolution to the US-Sino trade dispute – given a boost this week by a resumption of negotiations after the G20 summit in Osaka – and a positive turnaround in expectations about where interest rates might be headed next are sources of optimism.

One by one, threats to America’s long economic expansion have, so far, been dodged. Growing confidence this year, after a dismal end to 2018, has been palpable at times, interspersed with bouts of concern that have only served to punctuate a positive underlying story.

This week, we learnt that America’s current period of economic growth may already be the longest in recent history. According to the National Bureau of Economic Research, the longest previous expansion spanned the 120 months between March 1991 and March 2001.

However, the current expansion, which the NBER now calculates as having begun in June 2009, has probably just closed out its 121st month³.

So the big question is – and it’s one that has perplexed economists for some time – how long can this long bout of economic growth continue? That’s an important matter not only for America but the rest of the world too. On economic and foreign policy issues, the US remains of prime global importance.

From an investment perspective, one only has to examine the top constituents in the headline country indices that most of us look at to discover the international nature of the companies that reside there. No one stock market is an island, and it’s little wonder that progress on Wall Street is generally reflected, in part at least, by the paths travelled by other major world markets.

Before we celebrate too much what is now probably the longest US economic expansion, it’s worth remembering just how shallow much of the recovery since 2009 has been. It’s also been a recovery where wages have been slow to increase in real terms, despite a steep fall in the unemployment rate to just 3.6%⁴.

The blame for that has been largely laid at the door of the long-tail after effects of the global financial crisis. Shaken by the crisis, it’s plausible that workers have been persuaded to accept modest wage settlements or lower paid work than might have otherwise have been the case at this point in the economic cycle.

It’s a matter that has not escaped the Federal Reserve Bank, as it eyes inflation still below its 2% target. There’s been an abrupt change in expectations about the next moves in interest rates over recent months, from rises through no change and now to the possibility of cuts in 2019.

What rattled nerves last month was a sharp weakening in the employment picture, with the economy adding just 75,000 jobs in May compared with job gains of around 164,000 each month on average so far in 2019⁵.

Business sentiment has also suffered a severe blow of late with, according to an influential survey of US manufacturers published this week, signs of slowing demand both at home and abroad, weaker sales and geopolitical uncertainty weighing firms down⁶.

Both pieces of news warrant a close weather eye on economic events as they unfold in the second half of this year.

Against that, America’s economic expansion has, thus far, defied its many critics who have called an end to it on numerous previous occasions. For now, the miracle looks largely intact. Turning round a supertanker tends to take time.

What’s more, the Fed, in lifting rates over the past four years, now has some scope to reverse its decisions once growth begins to peter out. That may not be enough to fend off the next recession when it finally comes, but it could help soften the blow.

For investors wishing to adopt a more cautious stance as this current growth phase for the US economy reaches a mature stage, the Fidelity Select 50 Balanced Fund could provide an answer.

This fund is highly diversified, investing between 30% and 70% of its assets in equity funds and holds the remainder in bond funds (20% to 60%) and cash (0% to 20%). The amounts allocated to each type of asset are constantly monitored and altered according to prevailing market conditions. This fund invests mostly – at least 80% by value – in the elite band of funds that have graduated to Fidelity’s Select 50 list.

 

Tom Stevenson’s Investment Outlook webcast – 10 July 2019 at 12pm
This Wednesday, Tom Stevenson will be giving his outlook on world markets in a lunchtime webcast.
Login here to watch it live at 12pm on 10 July 2019.

 

Source:
¹ Federal Reserve Bank of St. Louis, 01.07.19
² Bureau of Economic Analysis, 27.06.19
³ NBER, 02.07.19
, ⁵ Bureau of Labor Statistics, 07.06.19
⁶ IHS Markit, 01.07.19

Important information

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