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Morrison: Long Recovery Still Has Room to Grow

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At last month’s CRU North American Steel Conference, amid all the talk of trade and tariffs, capacity utilization and carbon steel pricing, Lisa Morrison dared to bring up the R word – recession. Specifically, the principal economist for CRU Group asked, and answered, the question: Is a recession imminent?

A cursory look at history tells us that recession should be in the offing soon. The U.S. economy has been expanding for 112 months, the second-longest expansionary period since data began to be collected in 1854. Of the 34 previous periods of economic growth, only the 10-year expansion that peaked in June 1991 has been longer than the current stretch. Thus, conventional wisdom indicates we should expect a downturn sometime soon.

But a deeper dive into the numbers suggests the current period of growth still has some legs. 

“None of the really well known recessionary signals are flashing red yet,” Morrison said.

She said there were three prominent leading indicators that typically predate a recession: rising interest rates, an inverted yield curve and a reversal in employment gains.

Interest rate hikes are typically undertaken to keep an economy from getting overheated. In the two previous recessions, the recessions were related to bubbles that popped – the S&L crisis in the 1990s, the tech bubble in the 2000s and the housing-related financial crisis in 2008-09. No such bubble exists now. 

While interest rates have come up recently, and more from the Fed could be on the way, the rates were coming from such low levels that it’s hard to see them having much of an impact at the moment, she said. 

On the employment side, while the primary unemployment number has reached record lows, again a closer look tells a different story. The more comprehensive U6 Unemployment Rate, which incorporates part-time and structural unemployment, still has room for improvement. 

Finally, the inverted yield curve – when long-term interest rates dip below short-term interest rates – is not in play. Short-term rates have climbed in recent months, but have done so in tandem with the long-term rates. “We’re not anywhere near any kind of inversion yet,” Morrison said. 

Other signals are similarly positive, or at least not obvious warning signs. 

Consumer spending, responsible for almost 70 percent of the domestic economy, is healthy, though not as strong as consumer sentiment. “That’s unusual. One of two things is going to happen: either we’re going to see an expansion in consumer spending or we’re going to see sentiment turn the other way. Given how unemployment is looking, and the general feel, I think there’s still room to expand personal consumption, particularly since we just had a tax cut.”

Corporate profits are another sign of growth. Morrison expects to see an improvement in corporate profits during the third quarter, which paves the way for more investment spending. 

So why might this current expansion defy history? Well, for starters, it already has. GDP has only risen 23 percent since the Great Recession. In the three previous expansions that exceeded 90 months, GDP growth averaged more than 40 percent. 

“For such a long expansion, we haven’t had such a great rebound in economic activity,” she said. “I take that as a good sign, because it means maybe we have a bit more room to grow. The duration may not be the best estimate of when this expansion will end.”

Obviously, Morrison acknowledges, the U.S. will face another recession in the coming years. Right now, she’s looking at the next one still being more than a year off. One thing could change that. 

“Every time I put another round of tariffs or retaliation into our model, GDP gets cut down a little. Twelve to 18 months is what we’re looking at. Hopefully, there’s not a massive trade war escalation.”

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