Last year I talked about the modern era of expanding expansions. That is, the last few business cycles have been extremely long relative to historical cycles. Going back to the 1800’s the average cycle has lasted 39 months. But here we are in month 72 of the current cycle. It is tempting to say that we’re not just long in the tooth, but well past our expiration date. But perhaps that’s not true.
- First of all, the last three recoveries lasted an average of 94 months. We can theorize about why this is (Fed intervention, government policy, longer slower growth cycles, a more diverse global economy, etc), but the bottom line is that long recoveries are not that unusual in the modern era.
- Second, this was a very deep recession. In general, a deeper recession means more slack in the economy which means a much longer recovery period as that slack gets pulled tight.
Of course, it’s probably best not to think of the economy as moving in big “cycles” based on some mean reverting “natural rate” of growth. Instead, we should think of each cycle as its own unique environment and its growth will depend on the economic trends that develop during that economic expansion. And we know that economic expansions generally don’t die of old age, but die of excess. That is, we tend to see a boom before the bust. And considering how weak this “boom” has been so far it might not be entirely irrational to wonder if we’ve still got quite a bit of room to run here in this cycle.
More importantly, is the big outlier risk at this point still further upside in the economy as opposed to the next big crisis that everyone seems to be in search of on a daily basis? In other words, is our boom still in front of us before the next big bust? It’s looking like that just might be the case. Therefore, while we’re very likely entering the middle to later stages of this recovery the current 72 months relative to historical averages does not necessarily mean we’re at the end of the cycle.