Part 3 : How much longer can the current cycle continue? The US holds the key
As the gradual recovery takes hold, the question is how long this expansion, the longest in US history, can last. The conditions needed to push the US into recession are not currently on the radar.
Firstly, there are no overstretched macroeconomic indicators. Neither households nor businesses have exaggerated in terms of investment and durable goods orders. Although corporate debt levels are high, financing costs remain reasonable.
Secondly, economic policy looks set to remain accommodative. The Fed’s policy patience along with weak inflation levels suggest that monetary policy is unlikely to be tightened. However, in terms of fiscal policy, if the elections result in the Democrats gaining a majority in the White House and the Senate, a reversal of President Trump’s tax cuts could have a significant impact in 2021.
Thirdly, although the unemployment rate is at 50-year lows, it is unlikely that manpower shortages will hold back economic growth. Such a scenario has never arisen and the labour force participation rate for the 25–54 age group continues to rise. Japan is proof that this situation can continue.
Finally, there are no signs of any disruption in terms of corporate profits or investment levels. If the labour market continues to tighten and wages continue to accelerate, corporate margins will be squeezed unless productivity gains make up the difference. Nonetheless, lower corporate margins are not enough in themselves to prompt a cut in investment expenditure that would jeopardise growth.
To conclude, US monetary policy, and especially the Fed’s reaction to any continued wage acceleration, should remain a key factor in how long the current economic cycle can last. For as long as the inflation level does not warrant tighter monetary policy, it seems unlikely that the economy will be pushed towards a recession.
Accordingly, we could be looking at another 18 or even 24 months of expansion.
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The opinion expressed above is dated January 2020 and is liable to change. Latest available data is used.
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