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The cycle hasn’t died yet; long live the cycle?

03 June 2019

 Salomons Judgement

Yes! This economic cycle is the longest in history. Congrats! And many more years to come?

At the end of 2016, I told an audience of clients that they could best remember my presentation by a few numbers. 87, for example, as the largest number of consecutive months of economic expansion since the National Bureau of Economic Research started to collect these statistics in 1854.

In 2016, this cycle was the fourth longest ever. The cycle between November 1982 and August 1990 lasted 92 months and experienced an average growth of 4.3% per year. I thought in 2016 that it would be possible to surpass the 106-month cycle from the 1960s. But what would be next? The question then was whether there was anything left.

Most of us remember the longest cycle in history. That was the (technology) cycle, which lasted from March 1991 to the beginning of 2001. 120 consecutive months of growth, which could be called respectable with an average of 3.6% per year.

Now that it’s June and summer is coming, that record has also been broken. Yet something isn’t right. The average growth during this cycle has only been 2.3% per year. Inflation is also low. Where will this expansion end? They say that a cycle dies of old age, but is killed by the central bank. But in my previous column I stated that it is still too early for that. 

Crocodile’s jaws

To determine the end of the cycle, I like to use the metaphor of the crocodile’s jaws. The upper jaw of the reptile goes down when the return on capital (growth) is under pressure. The lower jaw rises when capital costs (interest) rise. But wherever I look, I don’t see any excesses. Not in the financial markets and not in the real economy.

A checklist then. The term structure flashes orange. The yield curve is at best flat as a pancake. At worst slightly inverted. That does not bode well. Valuations on the stock markets and credit spreads on corporate bonds, however, give no cause for concern.

On to the economy. Companies don’t invest excessively either. Global capex growth is lower than 5% (8% in 1999 and 11% in 2007). Moreover, the company balance sheets are healthy and profitability is up to par. And although the merger and acquisition machine is running and the number of IPOs is increasing, both have not yet reached levels to worry about.

My conclusion? The end of the current cycle is not yet within sight. That will probably only be the case when everyone says that it’s really different this time. But that doesn’t happen either now. It may be famous last words, but I bet at least another 12 months will be added.

The author

Roelof Salomons

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