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Talk to UsA first-quarter economic slowdown. An expansion which began in June 2009 and turned six years old last month. Ahead of Thursday’s report on second quarter Gross Domestic Product (GDP), investors may reasonably ask: Is the recovery getting long in the tooth?
History suggests that the answer is no, and that concerns of a prolonged slowdown may be premature.
At first glance, compared to the life of a typical economic recovery, six years is certainly mature. From 1970 through 2014, the average lifespan of post-recession recoveries across 13 developed countries was 72 months – which, as of June 2015, is the precise length of the current US expansion (Exhibit One).
Concerns of a US slowdown appear to be premature.
Source: Goldman Sachs Global Investment Research As of June 2015. The data looks across 13 developed countries. The average expansion length is based on data from 1970 to June 2015. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.
But this is no typical expansion. The present recovery, coming as it did after the global financial crisis of 2007-08, was preceded by a housing bust. We believe this is an important distinction. Isolating average expansions following housing busts shows that, on average, such expansions have been considerably longer-lived – at an average 101 months.
Historically, the deeper the bust, the longer the subsequent recovery has been.
US gross domestic product (GDP) shrank at a 0.2% annual rate in the first quarter of 2015, only the third time since the financial crisis that quarterly US economic output shrunk. Many economists expect growth picked up in the second quarter.
Economic expansions -- defined by the National Bureau of Economic Research (NBER) as periods when economic activity is increasing and GDP is positive – typically aren’t derailed by a single quarter. The last US recession – measured by NBER – occurred from December 2007 through June 2009 during the financial crisis. Since June 2009, the US economy has been expanding.
Historically, US recoveries of the current length aren’t unprecedented. Measured by NBER, the 1960s recovery—1961 through 1969—lasted 106 months, second only to the 1990s technology boom expansion, which spanned 120 months from 1991 to 2001.
Time frames notwithstanding, we believe fundamental indicators—as seen in Exhibit Two below—suggest the US economy is about mid-cycle in the current recovery. From inflation and manufacturing to financial and employment gauges, signs suggest the economy remains positioned for further growth.
Absent an exogenous shock, we believe the current recovery still has more room to run. Age, alone, doesn’t appear to be a reason to worry about the state of the expansion.
Key economic indicators suggest the US economy is mid-cycle in its recovery.
Source: Goldman Sachs Global Investment Research.
Chart Notes: As of February 2015. The spider chart looks at the ways that 15 economic indicators look across the stages of the business cycle. The data shows how current indicators compare with prior cycles, from January 1959 to February 2015. The early-cycle stage is defined as recovery, mid-cycle is defined as expansion, late-cycle is slowdown, and recession is contraction. The early-, mid-, and late-cycle labels are based on well-established stylized facts about the characteristics of the business cycle, such as output gap (in the early-cycle, the output gap is negative but economic growth is increasing), federal funds rate (higher mid-cycle than early-cycle), the yield curve (inverts late-cycle), and the unemployment rate (increases during recessions), etc. BBB Credit Spread refers to the spread in yield between lower investment-grade debt and Treasury securities. S&P 500 Index Volatility refers to the tendency of the S&P 500 index to swing in price over a given time frame. Inflation rate refers to the annualized percentage price increase in a basket of goods and services. Term spread is defined as the difference between interest rates at two different maturities. Real Gross GDP is an inflation-adjusted measure of the value of goods and services produced in a given year. Shown for illustrative purposes only. There is no guarantee that these objectives will be met.
