The Longest, Slowest, ‘Falling’ Expansion

Authored by Jeffrey Snider via Alhambra Investment Partners,

The current expansion is already one of the longest on record. With another quarter entering the BEA’s books, it has been 35 since the last declared recession. At +2.3% for the current one, there won’t be another considered anytime soon putting this economy within reach.

Yet, out of those 35 quarters only 10 have contained Real GDP growth meeting or exceeding 3%. In the late nineties, the tail end of the current recordholder, GDP advanced by at least 3% in fifteen consecutive. Now, it’s cause for hyperbole whenever this economy manages just two in a row (as it so rarely has). This is the scale of the current boom, the length of time alone.

There’s the big problem. If you say that the economy has expanded for nine years, it is often just assumed that it is doing so consistent with past expansions. To say nothing of the big contraction in 2008-09, it’s clear the economy struggles with those two problems where the combination of them is the amount of time adding up to only immense imbalances, problems, and vast costs (opportunity most of all).

We simply cannot consider it any other way, at least not if we are interested in avoiding the various mysteries that plague so much commentary (where’s the wage growth?) We cannot ignore the first part for the role it may have played in the second. In other words, the conventional view has it that the contraction (the 1st problem) in 2008-09 was somehow completely separate from the lack of recovery (the second problem). Calling it an expansion is just insulting.

It strains all common sense, especially given what happened to cause the contraction and what it is that keeps the current expansion from qualifying for that term in any meaningful way.

We are experiencing our own “L’s” as we bounce between periodic downturns and their limited upturns. The current quarter’s lackluster result continues the same frustrating trend where Real GDP following the near recession in 2015-16 is less than it was preceding it. The economic ceiling appears to be ratcheted downward for each one.

It’s this way for the important underlying components, too. Personal spending, in real terms, was in Q1 2018 the lowest Q/Q growth since 2013. And it continues the trend of “residual seasonality” that we’ve shown several times isn’t residual but is seasonal. The problem isn’t statistical but the “L” nature of this lengthy “expansion.”

Business investment, the necessary supply side addition of capex, also appears to be captured within a lower range post-2016 than it was 2013-14; which was already considerably less than 2010-11. It, too, qualifies as growth or expansion only in the narrowest, technical sense. The further diminishment of the upside if far more relevant than how many quarters might contain a plus sign.

The more extreme case for business investment, at least in terms of GDP components, is inventory. There has been a drastically different reaction to that last downturn, meaning that for two full years afterward businesses have responded to circumstances with far more caution. It is also a complete departure from sentiment surveys that have suggested only great optimism.

When any expansion of any nature comes out so uneven, that’s going to lead to more careful consideration as to economic participation. It’s an elevated sense over the past couple of years because of the growing distance between rhetoric or mainstream projections, and this much different reality.

Economists say everything is picking up, even that the economy itself now risks overheating. They appear unaware that businesses, in particular, have heard this all before – several times now. It’s an almost wait and see attitude at this point, quite appropriate for the circumstances. The boom, such that is, must now actually boom. Yet another positive quarter just doesn’t cut it.

In economic terms, or for GDP, that means a limited upside unless something actually and substantially changes. The latest BEA report merely confirms that nothing has. There isn’t one part that stands out to suggest otherwise. In its own way, it starts to lead us back in the direction of risk and the seeds of the next prospective downturn.

Instead, taken as a whole, everything points in the direction of a continued ratchet effect, these alternating “L’s” that though they haven’t qualified as additional recessions, and therefore the “expansion” remains intact, it works out to a completely different paradigm. This current economy is nothing like it might seem when focused only on positive numbers.

Recall then-Treasury Secretary Geithner’s August 2010 quasi-official announcement of the recovery:

The recession that began in late 2007 was extraordinarily severe, but the actions we took at its height to stimulate the economy helped arrest the freefall, preventing an even deeper collapse and putting the economy on the road to recovery…

The economic rescue package that President Obama put in place was essential to turning the economy around. The combined effect of government actions taken over the past two years — the stimulus package, the stress tests and recapitalization of the banks, the restructuring of the American car industry and the many steps taken by the Federal Reserve — were extremely effective in stopping the freefall and restarting the economy.

The 35 quarters of this near-record expansion state otherwise. The economy may no longer be in freefall (and it’s dubious to believe anything done during the crisis period was effective in stopping it) but that just does not mean it has stopped falling. It used to be that way, which meant you were either in recession or out of it, so by assuming the end of the contraction you could necessarily believe it was expansion. Each additional quarter that rolls by only leaves us further behind and in a weaker state (“L”) to deal with the consequences of being wrong about that.

The only number that matters is $4.4 trillion, not $17.4 trillion. The latter is the product of 35 quarters of positive GDP, increasing it in real terms from a low of $14.4 trillion when the last declared cyclical trough ended. Had that actually been a cyclical trough, as Secretary Geithner and all the rest were only expecting, GDP would have been something like $21.8 trillion in Q1 2018. That is an enormous difference, and that gap is the only thing truly growing.

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