Record-Setting Economic Growth

Patrick Labbe, CFA

It’s official: We’ve now entered the longest economic/business expansion in U.S. history. Never has the country completed more than 10 consecutive years of economic growth, as we did last month. Let’s review this record-setting expansion to see if it contains any special meaning for the economy or investors.

One factor leading to sustained economic growth was the unusual depth of the last recession. This meant that once a recovery was underway, it had the potential to last longer than average. To spur a recovery, very low interest rates and innovative monetary policies (the tools the Fed uses to manage the money supply and availability of credit) helped offset some of the slack in the economy. These and other factors helped to create the conditions that led to more than a decade of growth. Further, the rate of growth associated with this recovery was lower than in many previous rebounds, which may also explain why it’s lasted so long. We should also note that economic expansions have increased from an average of about four years prior to World War II to about seven years in the post-war period. Some theorize that this increase in duration may be due to improvements in monetary policy or the shift in the economy from asset-heavy manufac­turing to more agile companies based on intel­lectual property.

At the moment, there appears to be less interest in what led to the long expansion than determining when it will end. Of course there will be recessions in the future, but the business cycle doesn’t operate like a clock. Instead, recessions typically require an economic or financial disruption that catches most people off guard. Such turning points are difficult, if not impossible, to predict. For investors, things aren’t so simple either. If you overlay the business cycle with stock prices, you’ll find that stock prices tend to anticipate economic changes, typically falling months in advance of a recession and rising well before a recovery begins. The 2007 – 2009 bear market was a textbook example: The market peaked on October 9th, 2007, two months before the economy peaked that December and bottomed on March 9th, 2009, three months before economic expansion returned in June. An investor with even perfect knowledge of the economy’s ebbs and flows would struggle to put it to good use given the market’s forward-looking nature. Moreover, “current” economic statistics often take weeks to compile.

Investors have a lot to consider, including the current state of the economy and the outlook for growth. But the real returns for investors have come from sharing in the long-term economic gains created by risk-taking entrepreneurs who are motivated by a system of incentives to efficiently solve problems. Investors who can focus on this process of value creation will probably continue to benefit more than those who focus on trying to time the business cycle.