Goldman Sachs Sees 60% Chance U.S. Expansion Lives to See Ten

  • U.S. economic upswing now the 5th longest since 1900
  • JPMorgan warns tight labor market means risk of 2017 recession

Niall Ferguson: Don't Expect Recession in 2016

The U.S. economic expansion isn’t set to die of old age.

Seventy six months after emerging from the longest recession since the Great Depression era, the U.S. economy’s upswing is now the fifth longest of 34 since 1900 and almost twice the length of the average.

It has defied “double dip” warnings by seeing off external threats including Europe’s debt crisis and the recent China-led slowdown in emerging markets as well as home-grown risks including double-digit unemployment, a government shutdown and repeated cold snaps.

The upbeat analysis released late on Monday by Goldman Sachs Group Inc. is that it has longer to run. Indeed there is a 60 percent chance that it will reach the 10-year mark and rival the record of the 1990s, according to economist Zach Pandl’s analysis of 355 expansions across 14 economies since 1850.

His research suggests the duration of upswings has increased over time with those before 1950 tending to last only about three years. Since then, the U.S. average has been around five years compared with one of eight years in all 14 examined economies.

There are also extremes. While 30 percent in the past 65 years have lasted one or two years, another 30 percent have endured for two decades or more. The really long ones tended to represent the post-war rebuilding in Japan and western Europe.

The upshot is that even with the Federal Reserve poised to raise interest rates, the historical record suggests to Pandl just a 10 percent to 15 percent chance of recession over the next year.

“Although there are clearly some risks to the U.S. economy -- especially from developments abroad -- we do not expect the expansion to expire of old age,” he said.

Unemployment Unease

Not all are as sanguine. David Kelly, chief global strategist at JPMorgan Asset Management agrees that weak housing starts, inflation and interest rates suggest room for the U.S. to keep growing.

What’s giving him pause for concern is the speed at which the labor market is healing. In the seven expansions since 1960, the average trough in the unemployment rate has been 4.5 percent compared to October’s seven-year low of 5 percent.

If joblessness continues its recent pace of decline it would reach 4.2 percent a year from now and 3.8 percent in April 2017, according to Kelly. That would be enough to prompt the Fed to keep raising interest rates in the hope of engineering a soft landing.

The problem is that the U.S. central bank has rarely achieved that feat, with the average recession since 1960 occurring just eight months after unemployment hit its low.

That’s enough for Kelly to suggest the labor market is now warning of a “significant recession risk in 2017” even if other data disagree. For investors, that also raises the threat of the stock market correction that has occurred in all major recessions in the past 50 years, he said.

“None of this suggests an imminent economic threat to the current stock market,” said Kelly. “However, it does suggest a need to watch the unemployment rate carefully in the year ahead to see how quickly it is approaching a trough and how that is impacting the U.S. economy.”