This quarter marked ten years since the bottom of the recession, and the beginning of the current bull market. Since then, on any given day, you could turn on the television and find some pundit somewhere prognosticating the coming demise of the economy and the return of economic recession. I still imagine that somewhere in the basement of an NYU building, Nouriel Roubini is crouched behind a pallet of freeze-dried food and iodine tablets, waiting to be proved right. Somebody should check on him.
The reality is that the American economy has grown out of the panic of the recession, against the expectation and, sometimes seemingly, the will of the doomsayers. Despite what some are once again preaching, we see no reason to believe the end is nigh.
Economies have inertia, and they will continue in one direction until acted upon by a force strong enough to counter their movement. In other words, cycles of economic expansion do not have a prescribed duration; they continue until they don’t – until something stops them.
Two forces end expansionary cycles, like no other.
First is the Fed. A lot of people don’t understand what all the fuss is about when it comes to The Fed, so let me boil it down. The Fed controls interest rates. In other words, the Fed controls the price of money. When rates are low, money is cheap, and consumers and businesses are willing to borrow money to make capital investments.
You may borrow money to renovate your home or buy a new one; businesses may borrow money to build a new factory. These investments stimulate growth across a broad range of sectors. A miner needs to pull ore from the ground so a smelter can harvest it into the various metals needed for everything from wires and nails, to faucets and appliances. A lumberjack needs to harvest wood from a sustainable woodlot, so a mill can turn it into the studs that a carpenter will use to frame your home.
The simple act of a single capital investment triggers a cascade of positive economic activity. But, when interest rates rise, and the cost of money is too high, people and businesses become unwilling to make those capital investments, and the economy can begin to stall. This is why you hear people talk about The Fed so often.
Historically speaking, and relative to the current level of economic growth, we feel interest rates are still on the low side. Even with recent increases, Fed rates are not yet at a level high enough to stifle growth, and we don’t think they will be until they are closer to 3.5-4 percent. In fact, while many are beginning to talk about a cut in interest rates, we still believe that there will likely be at least one increase this year.
The other force that kills economic expansion is the government. It’s an unfortunate truth that the government’s knee-jerk reaction to any failure of government is more government. I think Ron Swanson has that on a tee shirt.
From the bottom of the recession to 2016, the economy grew at a very slow average of 2 percent per year, as the government piled on new regulation after new regulation in order to show constituents that it was doing something to cure its prior failures.
Effectively, it’s like killing the patient to cure the disease. “Congratulations, we cured your husband.” “But he’s dead.” “Yes, but so is his virus!”
The effect of new, and often redundant, regulations is an enormous cost of compliance. Every dollar that businesses and individuals spend on complying with government regulations is a dollar that isn’t being put toward some capital investment.
There is a line between regulation and over regulation, and we believe that everyone benefits when the government knows its role and regulates appropriately.
The Federal Register, which is a list of all of the Federal regulations and, therefore, a decent measure of the regulatory burden topped out in 2016 at over 95,000 pages. Since then, over 30,000 pages have been cut as regulations have been rolled back.
We can debate, endlessly, which of those regulations constituted government overreach, but that’s not the point. The point is, a reduction in the number of regulations results in a reduction in the cost of compliance. The ability to reallocate those funds toward things like technological innovation and hiring new workers is, at least partially, responsible for our continued economic success.
The rate of technological innovation has never been faster that it is today, and it will probably never again be this slow. When businesses are free to invest in technology that allows each worker to be more productive we all benefit.
Today, businesses are continuing to show increases in profits, and wages are now 3.2 percent higher than they were this time last year.
In the last two years, the economy has grown at about 3 percent per year. While that may not seem like a lot, consider that’s 50 percent more growth than in the average of years since the recession.
Add this all up, and what does it mean? We think the economy still has plenty of room to run and, barring any unforeseen geopolitical event, we don’t see any signs of recession in the foreseeable future. The only major contributors to possible economic slowdown – The Fed and government overreach - both seem to be in-check for now.
They say to make hay while the sun is shining, and the sun continues to shine on the US economy.
Stephen Kyne is a Partner at Sterling Manor Financial in Saratoga Springs, and Rhinebeck.Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, or Cadaret Grant, SEC registered investment advisors. Sterling Manor Financial and Cadaret, Grant are separate entities. This article contains opinion and forward-looking statements which are subject to change. Consult your investment advisor regarding your own investment needs.
