If the current economic expansion lasts another year and a half, it will be the longest on record, even surpassing the expansion of the 1990s that ended in early 2001.
Notice how we didn't say it'll be the "best" expansion of all-time, just the longest; it's not the best by a long shot. From the recession bottom to the expansion peak, real GDP expanded 39% in the 1980s and 43% in the 1990s. So far, eight years in, this one is only up 19%. That's why we've been calling it the Plow Horse Economy.
Still, the length of the current expansion is pretty remarkable given how doubtful most were that it would even get started back in 2009, as well as all the predictions since then that it would end in spectacular fashion during the past eight years. We think the odds of going at least another 18 months are very high. Nowhere do we see the kinds of policy shifts or imbalances that could curtail economic growth enough to throw us back in recession.
In terms of policies, tight monetary policy, a major shift toward protectionism, or large tax hikes could all hurt growth. In the past, tight money has usually been the key factor behind recessions. But, for now, short-term interest rates are about 125 basis points below the yield on the 10-year Treasury, roughly 200 basis points below the growth trend in nominal GDP (real GDP growth plus inflation), and the banking system remains stuffed with excess reserves. As far as tax hikes go, recent tax proposals would cut key marginal tax rates, not raise them.
Will there be another recession? Certainly! It's just very unlikely to start any time before Spring 2019, which means the current expansion looks set to become the longest on record. And if Congress and the President get their acts together and find a way to pass tax cuts or tax reform (or both!), that should postpone the next recession even further into the future.
Markets advanced last week as favorable economic data supported the positive momentum for both large and small cap stocks. September employment declined by 33,000 jobs, largely due to the net effects of Hurricanes Harvey and Irma. The report, though, points to improved underlying labor market conditions: average hourly earnings rose 0.5%, well above August’s 0.2% gain; and, the unemployment rate fell to 4.2%, the lowest reading since 2001. Meanwhile, the September ISM Manufacturing Index rose to its highest level since 2004 while the Services Index rose to its highest level since 2005. Both reports cited a pickup in new orders and employment, despite hurricane-related disruptions.
Globally, economic conditions are improving as well: China’s Purchasing Managers Index (PMI) rose to its highest level since 2012; Japan’s PMI rose to its highest level in four months; and the Eurozone’s PMI, with notable strength in Germany and France, stood near its post-recession highs. The confluence of growth across all major world economies should benefit areas of the market, including Industrials and small caps, which tend to outperform in these conditions. Moreover, the broad-based expansion is conducive to the Federal Reserve’s path of gradual rate increases.
This week, earnings season begins with JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo announcing Q3 results. Investors will key in on commentary related to lending activity and credit performance. Delta Air Lines will also report earnings. Airline stocks have come under pressure due to concerns related to fare competition; yet, many analysts believe that recent industry consolidation will help promote rational competitive behavior that supports sustained profitability. And, Fastenal will provide an early look into the state of the industrial economy. Investors will look to the earnings release and conference call for confirmation of improved levels of manufacturing activity. Overall, the significant hurricane activity has dampened expectations for the reporting period; nevertheless, we anticipate that management outlooks will reflect strengthening global economic activity, and signal confidence for 2018.
Source: Pacific Global Investment Management Company and Brian Wesbury
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week's Headlines
- Hurricanes Harvey and Irma could have had a significant impact on the employment figures for September, according to the latest report from the Department of Labor Statistics. The unemployment rate declined to 4.2% — 0.2 percentage point below August's rate. Hourly earnings rose by $0.12 to $26.55 and are up $0.74, or 2.9%, over the last 12 months. For the first time in seven years, nonfarm employment fell by 33,000 in September from August. This information, which may be revised over the next few months, certainly indicates that employment is reaching capacity and wage inflation is spiking, making it more likely that the Fed will raise interest rates in October.
- Hurricane Harvey may have disrupted shipping along the Gulf Coast, impacting foreign trade in August. The goods and services deficit was $42.4 billion in August, down $1.2 billion from $43.6 billion in July, revised. August exports were $195.3 billion, $0.8 billion more than July exports. August imports were $237.7 billion, $0.4 billion less than July imports. Year-to-date, the goods and services deficit increased $29.1 billion, or 8.8%, from the same period in 2016. Exports increased $84.9 billion, or 5.8%. Imports increased $114.0 billion, or 6.4%. A relatively weak dollar has made U.S. goods and services cheaper to buy for foreign consumers, expanding exports. Moderate domestic economic growth has encouraged buyers to shop in less expensive foreign markets, pushing imports higher.
- Purchasing managers were optimistic about the manufacturing sector in September. The IHS Markit final U.S. Manufacturing Purchasing Managers' Index™ expanded to 53.1 from August's reading of 52.8. A similar survey, the Manufacturing ISM® Report On Business®, also grew from 58.8% in August to 60.8% in September. Both the Markit and ISM reports also showed growth in new orders, production, and employment.
- In the services sector, purchasing managers were optimistic as reflected in the September non-manufacturing index of 59.8%, which is an increase of 4.5 percentage points over August. A reading over 50.0% represents growth, so September's reading indicates continued growth in the non-manufacturing sector, but at a faster rate. This is the highest reading since August 2005, when the index registered 61.3%. Non-manufacturing industries reporting growth in September include retail trade; real estate, rental & leasing; finance & insurance; and accommodation & food services.
- In the week ended September 30, the advance figure for initial claims for unemployment insurance was 260,000, a decrease of 12,000 from the previous week's unrevised level. The advance insured unemployment rate remained at 1.4%. The advance number of those receiving unemployment insurance during the week ended September 23 was 1,938,000, an increase of 2,000 from the previous week's revised level.
Eye on the Week Ahead
Trading during the Columbus Day week is expected to be slow. From an economic perspective, the first reports of inflationary indicators for September are out next week, including the Consumer Price Index and the Producer Price Index. Price growth has been weak for 2017 and is not expected to have changed much in September.
