The three factors that tend to trip up an economic expansion: shocks, excesses, and central banks.
The news that affects our industry continues to be mixed. I have written often about a tepid housing market for both new home starts and existing home sales, while trade disputes and political disharmony have stalled the nascent infrastructure bill initiative in Washington. But the facts show a different story: despite the gloomy predictions in the popular news about the current economy, we are about to break a record as the U.S. expansion reaches its 10-year mark this month. By July, it will become the nation’s longest on record, surpassing the decade-long expansion of the 1990s, and there’s no economic rule that says it must end.
One economic writer distinguishes long-in-the-tooth economic expansions from old cars by noting that they don’t just wear down and stop running after several years like old beaters do. Instead, something needs to happen to knock them off course. And the current economic expansion is indeed a doozie, as more than 20 million jobs have been created so far since the end of the last recession in mid-2009. Further, the net worth of American households, which is measured as the value of assets such as stocks and housing minus debts such as mortgages and credit card, has increased by $47 trillion.
Having said that, while the current expansion has been the longest on record, it has lacked strength, possibly underscoring the slow but steady growth. The growth rate has been the most anemic on record, and the jobless rate took years to recede, with lower-skilled workers only enjoying their own wage and employment gains in the last couple of years.
Wage growth also has been slow, though when adjusted for the very low inflation, real wages have grown more robustly than in other expansions. For many households, meanwhile, growing student debt loads have been a burden, and many of the gains from a strong market and recovering home prices went to the highest-income households.
So what usually derails economic expansions? One business publication recently summed it up by explaining the three factors tend to trip them up: shocks, excesses, and central banks.
Look at the recent history of downturns. In 1990, the oil price shock related to Iraq’s invasion of Kuwait helped to stall U.S. economic growth. It drove up gasoline prices and squeezed consumers and business profits. And, as I have illustrated before, in 2001 the bursting Dot Com bubble derailed a strong U.S. economy, followed by the one-two punch of the 9/11 terrorist attacks, which were an added shock to an economy already on edge. The stock price collapse in particular destroyed investor wealth and crimped household spending plans, while businesses reined in investment. Then in 2007, the greatest housing bust in history combined with a banking system run amok, led to the Great Recession, the worst downturn since the Great Depression of the 1930s.
And the one recurring behavior that preceded each of those downturns was Federal Reserve action, specifically interest-rate increases, which were meant to stop excesses from building. Higher rates hurt interest-sensitive sectors like housing and car buying and make it more costly for businesses to invest. In the most glaring example of the central bank’s key role in the U.S. business cycle, the Fed in the early 1980s pushed short-term interest rates sharply higher to tame double-digit inflation, driving the U.S. into a double-dip recession. One MIT economist famously wrote back in the 1990s that “none of the U.S. expansions of the past 40 years died in bed of old age; every one was killed by the Federal Reserve.”
The central bank earlier this year shelved further interest-rate increases, and many economists believe its next move will be a rate cut. For the construction materials industry, we can only benefit by further careful management of the current economic expansion by Fed policymakers.
About the Author
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pvillere@allenvillere.com. Follow him on Twitter – @allenvillere.