July marks the current economic (GDP) expansion as the longest in the history of the US. The US now counts its 121st month of expansion, longer than the 120-month boom recorded from 1990 to 2000. That is more than twice the average length of post WW2 expansions. However, as our analysis tells us, this has also been one of the most troublesome expansions in the history of the US.
Why is this important?
Nowadays GDP growth is still the benchmark for the state of the economy. It is the driver of income, employment, investment and consumption growth.
As mentioned, the US is now in the longest ever recorded expansion in US economic history. It is now spanning over twice the average length of post World War 2 era expansions.
That said, the current record-setting expansion doesn’t come without its challenges and downsides. For example, the 10-year average real GDP growth rate is and has been well below the 1947-2019 average real GDP growth rate for several years now.
Moreover, this can be further emphasized by the following statistics:
Below are the average real GDP growth rates for each of the 4 most recent expansion periods:
- 2009-2019: 2.3%
- 2001-2007: 2.8%
- 1990-2000: 3.8%
- 1982-1990: 4.2%
It is quite clear that GDP growth is slowing down. While there are many theories as to what causes that, in general, there are a few that I find very plausible. First of all, the financial crisis of 2007-2008 was marked with extremely high levels of debt. Although the Fed drastically cut rates to spur consumption and investment, companies, and households alike simply had too much debt and had to prioritize paying those off. It’s called deleveraging. Secondly, the pace of innovation has slowed down. As computers and digitalization had enormous benefits for the economy, can you name an invention (other than your smartphone!) that was completely revolutionary within the last 10 years?
Third, unemployment is near all-time lows. This is supposed to mean higher GDP growth, right?
Source: FRED (St. Lous Fed)
Well, if we look at what is called the labor force participation rate, we can see a different picture. The participation rate refers to the proportion of the working age population that is in the civilian labor market. Basically, if you are of working age, but are not currently looking for work, you are not included in the unemployment rate calculation but will be included in the participation rate calculations. As we can see, the participation rate has dramatically fallen within the last several years.
Not even that, the actual labor force itself and the working age population are both growing at extremely low levels, compared historically. This is due to the fact that the so-called “baby boomers” (70+ million of them, representing more than a fifth of the current US population) are now entering retirement age.
What does that mean? Basically, even though unemployment is low, the working population is not growing fast enough and isn’t interested in working as much to spur faster growth.
And what does this mean for investors? For equity investors specifically, it simply means that given the current high valuations, there is a slower expected growth rate in both GDP and stocks.
The S&P500 is currently trading close to the only resistance level of around 2955. The nearest support is around 2900. RSI is in the normal range, at around 64.