Why This Lengthy Economic Cycle Could Persist
Capital Group economist Jared Franz explains why the current economic expansion has gone on for so long — and could continue.
Capital Group Economist
10 years of investment experience
Matt Miller (moderator): The average duration of an economic cycle is roughly 60 months. We’ve already had, what, an 84-month expansion? What do you say about that?
Jared Franz: The numbers say one thing, but I think if you take an x-ray of the patient, it would say something else. And for me, I look at other things that tell me that, yeah, we’re probably past mid-cycle on the economy. But I don’t think we’re exhibiting the kind of late-cycle characteristics that you see in most late-cycle recoveries.
Matt Miller: What would you be looking for to know where we are in terms of past-mid but not yet done?
Jared Franz: A couple of things. You’d want to see broad-based wage pressure, so wages near 3% or even pushing 3.5 and 4%. That's one indicator of broad-based inflation pressure; the economy can generate inflation upwards of 2% sustainably over a long period of time. You’d also want to see a clear set of internal imbalances in the economy — so something like a big leveraging crisis or something like we saw going up in the last recession: house prices getting away from income. So I don’t see right now the first two, definitely. It’s hard to identify a clear set of imbalances that would be enough to bring the broader economy down.
Now, when I look internationally, China is my key point of concern. But the trip to China really assuaged that concern in the sense that I don’t think a hard landing is imminent, and I think that as long as the international environment stays relatively benign, the domestic environment can also stay relatively constructive.
Matt Miller: And it’s possible, is it not, that you can go on for years with modest growth, without a recession?
Jared Franz: That’s a good point. Going back to x-raying the patient, you really want to look at the imbalances. One of the things about the crisis that it did with some of the bank regulation is really restrain the lending behavior of the banks, and the banks are in a much stronger position. But by restraining that banking behavior, you’ve also restrained the cycle to a certain extent.
So we went from an era where we didn’t want leverage — we didn’t want to get [that] juiced-up type of economic growth — to an era where we’re OK with more moderate economic growth. But we also had to face the consequences that 2 to 2.5% might be the best we get and that in that context, the economic cycle can last for a period of time much longer than you would think in that prior cycle.
Matt Miller: Because we’re not doing the boom and the bust. Interesting.