The current expansion, which started in June 2009, is now the longest in recorded history since the 1850s. The current expansion became the second longest in May 2018 and, in July 2019, it became number one. But most of all, if the current expansion endures to January 2020, then it will mark the first calendar decade (the 2010s) without a recession.
Recessions are relatively common and frequent. Before 1930, recessions occurred equally 1 to 4 times per decade. After 1930, recessions occur once per decade about a third of the time and twice per decade about two-thirds of the time. If history is a guide, we should expect 1 to 2 recessions each decade.
The current slow, long expansion has come at great cost. Had this expansion simply grown at the historically-average rate for expansions, the economy, standards of living, and average worker incomes would be more than 20% higher than they are today.
Even if such growth over the past decade had been punctuated with a typical recession, the economy and standards of living would be more than 10% higher. No wonder we have a current environment of economic frustration.
The current economic expansion, so far, is currently the fourth longest on record (out of 34 since 1854). This chart compares the duration and magnitude of the current expansion to historical averages. Economists often review the economic cycles after 1950 as a separate set. Therefore, the historical averages are presented with all years since 1854 and the years since 1950. You will see that the current expansion is considerably slower than the historical averages and slower than 90% of all past expansions.
Slow-and-steady has come at a great cost to wage growth and standards of living. Had this expansion been simply the modern average, wages and standards of living would be 18% higher today than they are after slow-and-steady! (“Expansion” is the most appropriate term for the growth period that follows a “recession.” Not only must expansions happen first–the first economic step could not have been a recession from zero!–but also recessions are periods of correction for misalignments that occur during preceding expansions. Further, the term “recovery” implies that actions might be needed to “fix” the economy from a recession, rather than to allow the natural forces of population growth and productivity to deliver economic expansion.) Nonetheless, the economy is in a race to a new longevity record: third place next March 2017 and first place in July 2019. The age of the current expansion also represents a risk for the stock market should a recession end its run.
It has been said repeatedly that the current sluggish economy is the result of the recent “worst recession since the Great Depression.” It’s probably time to reassess the medicine, rather than continue to blame the illness.
This chart does not advocate a particular economic policy, rather it provides contrasts of historical experience. The rate of economic growth can have a significant effect on stock market valuation, the market P/E, and future returns: See Game Changer
Economic output, as measured by real gross domestic product, reflects the amount of goods and services produced by labor and capital in an economy. The change from period to period, excluding the effects of inflation, measures the real economic growth occurring within the economy. Economic growth has been relatively consistent over many decades in the U.S., as a result of fairly constant population growth and generally consistent productivity gains (at least in the longer-run). During the 1930s, economic growth stalled; it then subsequently recovered its long-term average growth rate through an above-average decade in the 1940s. Real GDP in the decade of the 2000s was significantly below average. It is as yet unclear whether the economy downshifted to a new level of slower growth, or whether pent-up economic production will drive a high-growth decade in the 2010s or beyond that again restores the long-term average.
Economic growth, as measured by GDP, is driven by two components: population growth and labor productivity. Labor productivity reflects the capacity for increased output from the existing quantity of labor in the economy. Various government agencies and independent analysts produce measures of labor productivity. For high-level analysis of the second component of economic growth, a productivity measure using overall economic production provides the most comprehensive and consistent measurement of economic productivity.
Economic growth, as measured by GDP, is driven by two components: population growth and labor productivity. Population growth represents a surrogate measure of the quantity of labor in the economy. Although there are numerous measures that are more refined (e.g., labor force participation, total employment, etc.), over time total population growth has provided a reasonable estimate for high-level analysis of the first component of economic growth.
Nominal GDP consists of real GDP plus inflation. This chart presents the two components of nominal GDP for all 10-year periods since 1900. The 10-year periods smooth some of the variability of economic growth and the inflation rate to display the contributions of each component over longer periods. Of particular note, the loss of real economic growth during the 1930s was made up in subsequent decades thereby restoring the long-term trend of fairly stable real economic growth over time.
Nominal GDP and earnings per share (EPS) have a close and fundamental relationship. Nominal GDP is driven by the economic cycle, with real GDP providing core growth and the inflation rate adding a degree of variability over time. Earnings growth is driven by the business cycle, which revolves around the economic cycle with swings that have greater magnitude and frequency. The primary driver for the core baseline of earnings over time is nominal economic growth (yet GDP does not consistently drive EPS in the short-run).