Wirecard und Thyssen als Renditeknaller - Seite 2

In answering this question, I won’t repeat the three reasons for caution about the near-term outlook for the economy and markets that I explained two weeks ago – the likely further slowdown in U.S. economic growth to stall speed in the next couple of quarters, the possibility that Fed policy remains restrictive even after the three rates cuts this year, and the fragility of the trade truce between the U.S. and China. Rather, let’s look at the features that have made the current economic expansion the longest on record and ask whether they can be taken for granted over the medium term.

Of note, this decade-long U.S. economic expansion has been more lackluster than most of its predecessors. In its early years, I started to call it a triple-B expansion – bumpy, below-par and brittle – and that is what it has continued to be until today. Not only growth was below-par: inflation has remained stuck below the Fed’s target for most of the decade despite a decline of the unemployment rate to a 50-year low, with the latest (October) reading of core PCE inflation released this past week at 1.6% year-over-year.       

So how could a triple-B expansion that actually faced a couple of near-deaths over the past decade become the longest of record? As I see it, three features played an important role.

First, the long shadow of the previous housing and credit boom-to-bust cycle made kept private households in deleveraging and saving mode throughout the past decade and thus prevented spending excesses that would have required a correction. In fact, the personal saving rate, which had fallen to around zero before the last recession, currently stands at close to 8% of disposable income. 

While private households de-levered in the expansion, the corporate sector levered up, taking advantage of ultra-low interest rates. However, in contrast to the late 1990s boom, corporations did not indulge in debt to over-build capacity but rather mostly to buy back equity and/or engage in M&A. While high corporate leverage is an important vulnerability that could exacerbate an economic downturn caused by other shocks, it is unlikely to be a stand-alone trigger for a recession. Taken together, this expansion has so far been characterized by a healthy absence of both over-consumption and over-investment, which helps to explain its longevity.