This is a theme I am starting to hear a lot more of lately – the idea that we’re actually still very early in the business cycle. In a weekend note Goldman Sachs reiterated this point saying:
An economic contraction is decidedly NOT in our forecast. Investors point to the 18% collapse in Brent during the past six weeks, the weak macro data from China and the spillover effect on global demand growth, lingering uncertainty in Europe and the 25 bp compression in the 10-year US Treasury yields during the last 30 days as reasons for concern about a US downturn. Our response is that, while the current US expansion is long in temporal terms (6 years), the magnitude of the recovery is weak and on that basis the expansion phase is closer to early/mid cycle.
That’s about as optimistic as it gets. As I’ve noted before, economic expansions in the modern era appear to be getting longer and longer, however, the longest recovery on record was the 1990’s recovery which lasted 119 months. The last three recoveries have lasted an average of 94 months. What Goldman is essentially saying is that a record setting recovery is their baseline forecast now.
Personally, I am inclined to veer towards the US economy being in the middle to later stages of the recovery. When we think of economic “cycles” it’s typical for people to think that cycles just stop at some point as if they die from natural causes like many elderly people. But I would argue that recessions aren’t anything like death by “natural causes”. Instead, they tend to be jarring and sudden events that reflect something more like a drug induced heart attack. In other words, it’s not the age of the recovery that matters so much, but the degree of excess that is occurring. So far, we don’t see a lot of excess anywhere in the economy. We all seem ready to party, but no one is willing to host that party quite yet. There are some good prospects (real estate again, corporate debt binge, stock price boom, etc), but we’re still not quite there.