The Second Longest Ever Period of U.S. Economic Expansion Continues

by: Richard A. Anderson

When the calendar turned from July to August, the United States economy celebrated its 109th consecutive month of expansion. This current period, which began in June 2009 following the Great Recession, is the second longest economic expansion in the history of the United States. While this current economic expansion is one for the record books, it sure hasn’t felt that way for a range of Americans who still don’t feel financially secure. As the chart below shows, annualized real gross domestic product (GDP), which is a measure of economic growth, is the lowest of any economic expansion since 1950.

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The slow and steady nature of the recovery has aided this expansion to reach such longevity. Other economic expansions had greater real GDP growth than this current period, but those other expansions also didn’t last as long.

This economic environment is a stark contrast to the U.S. stock market, which has been in a nine-year bull market with above-average returns. Since the start of this current economic expansion in June 2009, the S&P 500 has had an average annual return of 15.4%. As a result, Americans may not feel the strength of the economy when looking at their paycheck, but their investment portfolios have surely benefitted. As the chart below shows, although a 15.4% average annual return for the S&P 500 is about 50% higher than its long-term average, the returns experienced are not unusual for a period of economic expansion.  

This chart also highlights an often-misunderstood concept: the economy and the stock market are not the same. The standard gauge of how an economy is performing is real GDP, which measures how a country increased the value of its production over time. Thus, real GDP is backward looking. Stock prices, on the other hand, are primarily driven by expectations of a company’s future earnings. Thus, stock prices are forward looking.

As Larry Swedroe, director of research for Buckingham Asset Management and author, eloquently stated in an interview with CBS Moneywatch, “The big difference between the market and the economy is that the market is forward looking, and it's unexpected events that primarily drive future stock prices. Thus, it doesn't even matter whether future news is good or bad. What matters is whether it's better or worse than already expected. So with all the bad news, unless things turn out to be worse than expected, stocks should provide good returns.”

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The longest economic expansion in U.S. history lasted from March 1991 to March 2001, a total of 120 months, which ultimately ended with the Dot-Com Bust. For this period of sustained growth to become the longest ever, it will have to last until July 2019, or another 12 months. And we may get there.

The outlook for the U.S. economy remains positive. The most recent U.S. economic data released on July 27, 2018 saw year-over-year GDP growth of 4.1%. That’s the fastest rate of growth since Q3 2014 and the third-best growth rate since the Great Recession. The unemployment rate remains around 4% and inflation remains rather tepid. This has allowed the Federal Reserve to keep interest rates at historic lows for an extended period of time. Couple these characteristics with the recent corporate and personal tax cuts and you have a recipe for continued economic expansion.

Sure, there are potential barriers that stand in the way of economic growth. Concerns over trade negotiations, geopolitical headline risks, and the Fed raising rates all present headwinds. But these concerns typically evaporate as all parties involved want to avoid negative economic ramifications.