Happy 10th Birthday, Economic Expansion
The United States economy is in the midst of a record-breaking economic expansion. As of July 2019 the U.S. economy has grown for 121 months surpassing the previous record spanning from March 1991 to March 2001. While this seems like cause for celebration many investors who experienced the last recession have been looking over their shoulders since 2009 wondering when the next one will begin.
In 2015, Federal Reserve Chair Janet Yellen famously said, “I think it’s a myth that expansions die of old age. So, the fact that this has been quite a long expansion doesn’t lead me to believe that…its days are numbered.” Four years wiser, now former chair of the Federal Reserve Yellen confirmed her view at a January conference by repeating “I don’t think that expansions just die of old age.” So, the question remains, can this expansion continue?
First, a quick review of economic recession. The National Bureau of Economic Research (NBER) is a non-profit organization of economists most famous for their Business Cycle Dating Committee work. This committee has become the official arbiter of when economic contractions and expansions begin and end. According to them the current expansion began in June of 2009. The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Usually, the NBER announces a downturn well after it has begun—often a full year—and sometimes after the next expansion has started. By that time, most understand what has occurred based on a reduction in their equity portfolio values, a decline in their home value, or job losses either directly or by friends and family members. The announcement confirms the event but certainly doesn’t help avoid it.
So, if expansions don’t “just die of old age,” what will end this record period of growth? Past slowdowns have been triggered by the Federal Reserve tightening monetary policy in order to fight inflation. Others have been caused by financial crisis, like the 2008 subprime mortgage collapse and technology crash of 2000. In the 1970’s dramatic oil price increases contributed to a contracting economy and deep recession. Finally, there has been some concern the current trade tensions could escalate. In short, no one knows what will trigger the next contraction; it could be an unforeseeable shock to the global economy or a slower moving development like a protracted trade war.
There is inherent uncertainty for what lies ahead and how markets will respond. That is why having someone to regularly meet with or call – like your Johnson Bixby Financial Planner – will help you define and meet your financial goals. We align investment portfolios to your plan and make appropriate adjustments with a well-diversified mix of stocks, alternative investments and an amount of quality bonds that can help reduce volatility leading up to and during periods of financial uncertainty, like recessions.
Written By Lynn Snyder, CFA