[REN #758] U.S. Economy: OFFICIALLY the Longest Expansion in U.S. History

Picture of the Statue of Liberty for Real Estate News for Investors Podcast Episode #758

The nation may have more than one reason to celebrate this 4th of July. Barring any unforeseen economic upheaval in the days ahead, the beginning of July will mark the longest economic expansion in U.S. history. But that doesn’t mean it’s the largest expansion we’ve ever seen. It only means it’s the “longest.”

Yes, we will see headlines about how wonderful this economy has been. President Trump likes to take credit for creating the robust returns that investors have been getting in the stock market. Rising home prices have also lined many pockets in recent years, and a strong job market has given people money to spend, and boosted consumer confidence to lofty levels.

Economists also say that lower taxes and an increase in government spending have helped the economy to thrive. But when you look at the rate of economic growth, they say this expansion has been among the slowest since World War II. In summary, we should not judge the strength of an economy only by the number of years it’s been growing. We also need to look at how fast it’s been growing, and by how much.
 

Dismal Economic Growth

According to a report in Bloomberg, the rate of growth for this expansion has been dismal. (1) The report has a graph from the Bureau of Economic Analysis showing the rate of expansion for ten-year segments starting in 1961. They run from 5.1% during the first ten-year segment, to 6% for the next ten years. They ratchet down from there to just 2.3% for the last ten years. It’s clear from this graph that we haven’t seen the kind of economic growth this time around that we have seen in many previous decades.

What we have seen is a recent bump in economic activity, commonly referred to as the “Trump Bump.” There’s been a bull run on Wall Street since he was elected. And the job market has bounced back from the recession with a current unemployment rate of 4.1%. The economy is stronger than it was under President Obama, and some of President Trump’s policy changes have contributed to that, including tax cuts. But some economists say the heightened economic activity is also due to a boomerang effect from the Great Recession.
 

Trump: The Fed “Blew It”

President Trump may not agree with that. He likes to pat himself on the back for the economic conditions we’re seeing now. He also blames the Fed for holding the economy back. He said in a tweet that the Fed “blew it” by raising rates four times in 2018, and failing to cut them in recent Fed meetings. In one Tweet, he said, “Think of what it could have been if the Fed had gotten it right. Thousands of points higher on the Dow, and GDP in the 4’s or even 5’s.”

As reported by the New York Times, the rate cuts were meant to keep the economy from overheating. (2) They help sustain stable growth and keep inflation from running too high. As it stands now, Fed Chief Jerome Powell has indicated that the central bank is poised to cut them again, if necessary, to keep the economy on a positive track, and avoid a recession — or at the very least, to give us a softer landing.

Some economists are saying we could be headed into a recession in the months ahead, but even if that happens, with or without a rate cut, we probably won’t fall as far or as hard as we did before. The housing market is much stronger than it was back then. Foreclosures are low, equity is high, and loans are solid. Most homeowners are locked into low rates so they will fight hard to remain in their homes and avoid more expensive rentals. Even if there are job losses, people will be more inclined to hold on tight to their real estate.

Economists are expecting to see a decline in the stock market. The Wall Street Journal said on June 14th, that the current “bull run” is 3,750 days old, and the longest in the S&P 500’s 90-plus-year history. (3) The report says that stocks have more than quintupled during this last ten years. At some point this expansion will end but it’s impossible to predict precisely when that will happen. As the Journal points out, Australia hasn’t had a recession in 27 years.
 

Recession Impact

It’s also impossible to predict the impact of a stock market pullback or collapse. Would it hurt the housing market? I think the biggest impact will be felt in high end neighborhoods, but middle class housing will be relatively secure — unlike the housing meltdown in 2007. Back then, many people had loans they could not afford. Subprime loans were common. The mortgage industry is much different now. Underwriting has improved immensely.

There are signs that the economy could falter however, and the ongoing tariff dispute with China is certainly rattling a few Wall Street cages. Andrew Ang of BlackRock Inc. told the Wall Street Journal, “Economic growth is still relatively high, but the pace has been decelerating, putting us closer to the turning point.” He says, “This is a time when investors should seek resilience in their portfolios.”
 

Buy Real Estate

He was referring to your stock portfolio, in reference to owning more international stocks and stocks associated with quality companies.

Real estate, on the other hand, can generate cash flow (unlike most stocks). High end property values may stagnate or even fall, but there’s no way that will evaporate into thin air. And if you own rental property, you are not only gaining equity, but also cash flow that could help you get through any down cycle we may be headed into.
 
Links:

(1) Bloomberg Article

(2) New York Times Article

(3) Wall Street Journal Article

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