Is our economic expansion doomed?

There are economic worries for the year ahead

It’s been another good holiday season for American companies. According to Mastercard SpendingPulse, retail sales grew 3.4% this holiday season from last year. That’s not as good as last year’s 5.1% year-over-year growth, or the 4.9% retailers posted in 2017, but the economy’s obviously not in recession, which may be the nicest gift that Americans got this year.

After all, this is now the longest economic expansion in U.S. history. And the indicators show the fruits of that growth. It’s not just strong retail sales, but high consumer confidence, strong employment and declining bankruptcy rates. True, that prosperity hasn’t always been evenly distributed — almost all the growth in holiday sales, for example, went to online retailers, while brick-and-mortar stores stagnated. But some of the distributional inequality will be welcome news to anyone who has worried that we’re becoming a winner-take-all economy, a Dickensian dystopia of haves and have-nots: In 2019, the wages of rank-and-file workers not only grew faster than the economy did, but outpaced the raises their supervisors collected.

It’s enough to make one very nervous. The Great Recession ended in June 2009, meaning that Americans have enjoyed uninterrupted economic growth for more than a decade. It only stands to reason that this recovery, like all good things, must eventually come to an end — and the longer the recovery goes on, the more imminent that end becomes. So it’s nice, but a little surprising, to discover that we continue to stave off the inevitable.

But that doesn’t mean that our appointment with recession is particularly near to hand. Most of us have an intuition that economic expansions are something like cars, or human bodies — after a certain point, they begin to wear out, and the longer they’ve been around, the more likely they are to die. And that intuition apparently used to be correct — before World War II. Back then, the chance of an economic expansion ending in a given month rose with each month that the expansion wore on, and by the time the economy had been expanding for four years, in any given month, the odds that it would enter recession were almost 25%.

But research from Glenn Rudebusch of the San Francisco Fed suggests that postwar, that calculation changed. The odds of recession at best rise very modestly, so that by year four, they were only 2% a month, and 23% for the whole next year. The curve is so flat that Mr. Rudebusch writes “based only on age, an 80-month-old expansion has effectively the same chance of ending as a 40-month-old expansion.”

That still leaves us with a nearly 1-in4 chance that we’ll slip into recession sometime in the next year. But why not turn that frown upside down? A 1-in-4 chance we’ll have a recession means a 3in-4 chance that we won’t! Nor do we need worry unduly about the hangover: While you might think that such a long stretch of good times must mean that we’re in for an unusually savage correction, there’s little evidence for that theory. Recent research from the Cleveland Fed indicates that the causality is more likely to run the other way, with unusually steep downturns followed by unusually strong recoveries. That being a pretty good description of our current economic picture.

To be sure, there are economic worries for the year ahead. Trade wars are not, it turns out, good and easy to win, and decoupling from China, whatever the strategic arguments, is bound to exert long-term drag on economic growth. That said, we’re now likely past the worst of the trade war, and if it didn’t throw us into recession a year ago, it’s probably not going to now.

The harder-to-quantify risk is simply that by now we’re in uncharted territory. Since no U.S. expansion in modern economic history has ever gone on this long, we can’t be sure that there isn’t some tipping point where they do start to die of old age.

But then, we can’t be sure that a vacuum decay bubble isn’t at this very moment expanding toward the Earth at exactly the speed of light, preparing to wink us out of existence without warning. That’s really no reason not to pour the champagne and toast the new year with high expectations.