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A Lurking Recession or Continued Economic Growth?

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The U.S. economy has expanded for 107 months as of this month, making it the second longest expansion on record.
The big question is whether economic growth will last 15 more months to hit record territory in July 2019 when it would surpass the longest expansion on record at 121 months.
The pessimists point out that interest rates are rising, the yield curve is flattening, consumer debt is increasing, inflation is inching up, and the stock market is down — all pointing toward a recession, not an expansion.
Yes, interest rates are rising, but they still remain at historic low levels.
The benchmark 10-year Treasury yield, for example, has risen sharply from an all-time low in 2016 to end Wednesday at 2.97 percent, but still that is far from the 5 percent yield that it hit before the Great Recession began.
An inverted yield curve often proceeds a recession as the Federal Reserve is pushing the target federal funds rate higher, which causes 3-month bills and short-maturity Treasuries to rise above the longer-term 10-year Treasury.
As of last Wednesday, the yield spread, or difference between the 10-year and 3-month yields, was 113 basis points which provides plenty of room for the Fed to raise short-term interest rates during the process they say will be one of “gradual tightening.”
Consumer spending makes up about two-thirds of gross domestic product, so their health is critical to national growth.
Debt has been rising slightly but the broad household debt service ratio from the Federal Reserve was at a fairly low 10.3 percent in the fourth quarter of 2017 — much lower than the 13.2 percent at the start of the Great Recession.
On the other hand, tax cuts, low unemployment, and rising wages point to more spending power to fuel economic growth.
Rising wages do suggest the potential of a pickup in inflation, which could lead to more Fed tightening than currently expected, but such a scenario does not seem likely to occur over the next 15 months.
Increased investment by businesses in new plants and equipment resulting from corporate tax cuts and reductions in regulations also will support future economic growth.
Aside from the increased sales to firms that construct plants and manufacture equipment, business investment will ultimately increase productivity, which enables the economy to grow faster.
But what about the 10.1 percent decline in the Dow Jones Industrial Average from its all-time high on January 26, 2018?
Even with the recent drop, the Dow remains about 30 percent higher since President Trump was elected.
The stock market tends to be pessimistic as Paul Samuelson, a well-known economist, said in 1966: “The stock market has called nine of the last five recessions.”
Based on these trends, and many others not noted in this column, I’m betting on this expansion going down in the record books as the longest in history.
(The article first ran in the May 7, 2018 edition of the Richmond Times Dispatch.)
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