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Don't be ageist against America's economic expansion: Morning Brief

Sam Ro
Managing Editor

Monday, December 2, 2019

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OK economy

Unlike most living organisms, bull markets and economic expansions don’t die of old age.

This is something that Wall Street’s market strategists and economists are having to explain to concerned clients who’ve seen the stock market rally and the economy expand for more than 10 years.

“[A]t the back of many minds lies lingering uncertainty about how much longer the expansion can last even if we avoid a recession in the near term,” JPMorgan economist Michael Feroli wrote on Monday.

“We would agree that expansions don’t die of old age alone.”

Now, Feroli isn’t saying we should be popping champagne. He expects GDP growth to slow to a run rate of around 1.5% in 2020, down from about 2.1% in 2019. And it’s the JPMorgan house view that the economy is late-cycle.

But even in the context of the recovery being late-cycle, JPMorgan’s experts note that there are plenty of bullish things in the current economy that make it uncharacteristic of an economy doomed to collapse.

“Despite several missing pieces in this template as 2020 nears – global monetary policy is loose, geopolitical risks are ebbing and leading sectors like manufacturing are bottoming – many investors still ask how much late-cycle issues should matter next year,” JPMorgan strategist John Normand wrote two weeks ago.

“This question partly reflects ageism, since many associate business cycle length with fragility even though the expansion whose end was most damaging to financial markets (the 2001-07 one culminating in the GFC) was barely longer than the post-war average,” Normand added.

“The query also reflects a misgiving that the most significant changes in the global economic and market environment over the past year have been on policy rather than on leverage, growth/profits momentum and valuations.”

Expansions don't die of old age.

So, it’s complicated. We’re more than 10 years into an economic expansion that’s been underwhelming and yet things don’t appear as grim as they did just six years into the prior expansion.

But old age, it seems, is still old age.

“We are also well aware that it has been very unusual for expansions to last for more than a few years once the economy reaches a state like we see today,” Feroli writes, noting that the current environment features low unemployment, rising wage pressures, and narrowing margins.

And so, uncertainty persists.

The pleasant irony of all of this is current concerns appear to be preventing the buildup of excesses that set the economy on a course for major problems.

“We continue to see vulnerabilities in the economy as ample, but not glaring, and we do not think a recession is inevitable,” Feroli said. “But we also suspect that lingering doubts would limit the exuberance of the rebound that might follow a near-miss on recession.”

If Australia’s economy can grow for 29 years, why not the U.S.?

And at least as Federal Reserve Chair Jerome Powell sees things, it’s possible the recovery goes on indefinitely.

By Sam Ro, managing editor. Follow him at @SamRo

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What to watch today

Economy

  • 9:45 a.m. ET: Markit U.S. Manufacturing PMI, November final (52.2 expected, 52.2 prior)

  • 10 a.m. ET: ISM Manufacturing, November (49.2 expected, 48.3 in October)

  • 10 a.m. ET: ISM Prices Paid, November (47.0 expected, 45.5 in October)

  • 10 a.m. ET: Construction Spending month-on-month, October (0.4% expected, 0.5% in September)

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