As we enter the fifth year of the current expansion, controversy continues to rage over its viability. In this piece we touch on some of the reasons why.
In every phase of every business cycle, forecasters of the process of phase change, whether it be from expansion to recession, or from recession to expansion, face the same objection: “This time it’s different.” Part of the reason why that objection is raised is that every phase of the business cycle has its permanent fans. Those who like expansions will deny recessions. Until they happen. Those who prefer recessions will deny recoveries. Until they happen.
Those of us, who just want to identify the phases, and phase changes, correctly and opportunely, are used to the objections, and the objectors. We factor their views into the forecast process by taking account of the vehemence with which the objections are raised. In case you haven’t noticed, the recession deniers are loudest just before the peaks, and the recovery deniers are loudest just before the troughs.
Jim Picerno and I have had a long correspondence on the subject of how to find and report cycle turning points. He has developed an array of tools to try to bring both accuracy and immediacy to the effort. His blog is at http://www.capitalspectator.com/
He recently sent me a note about a recurring topic of our correspondence: the central question of which was “what are we missing”? Is there something measurable out there that we either can’t see, or, worse, are misreading? The word measurable is in that sentence to set apart the true surprises – earthquakes, strikes, revolutions—that can shock the system but are, in for all practical purposes, unforecastable. We can be informed of the location of a seismic fault line, but we cannot predict when the earthquake will happen.
All of which by way of introduction to the topic of this piece. In my last two reports to my clients I discussed the characteristics of the recoveries that have had a fifth year. Yes, this is the fifth year of the current expansion. And, it was while doing the research behind those reports that I found what I think are three key differences between this expansion and the others we have seen of similar longevity.
1. This recovery has no cheerleaders.
2. This recovery has no “bell cow”, that is a clear leader.
3. This is the first time I have heard people complain that the S&P500 is up more than 1000 index points from its recession-associated low .
Why do these things matter? Because each of them explains an important aspect of the “look and feel” of this expansion.
The absence of cheerleaders, whether they be in the political, business, policy, or pundit realms, has deprived us of a benchmark against which to measure progress, or the lack thereof. Various efforts have been made, but none has been sustained.
More important is the absence of a “bell cow”. In the long expansion of the 1960s we built the modern consumer economy. In the long expansion of the 1990s we had the tech boom. In the long expansion of the 2000s we had a financial and a housing boom. We are still taking applications for the “bell cow” position for this episode.
Lastly, the downplaying of the rally in the stock market has removed an important link between economic and financial progress. In the old days as recessions were ending, we looked to the stock market for confirmation that a recovery had gotten under way. And, the longer the rally lasted the more confidence we gained that an expansion was unfolding. For a variety of reasons, many of which Jim has covered in detail, that process is not working the way it used to. What this will mean for the path of the expansion and what we will be able to infer about the onset of the next cycle peak from the track of stock prices is one of the great unknowns of this episode.
So, Jim, to answer your question: this time it’s different, squared.