The business cycle
Puncture ahead America’s economic expansion is now its longest ever in peacetime
EXPANSIONS do not die of old age; they are typically murdered by policymakers’ mistakes. Even so, America’s current expansion is looking decidedly long in the tooth. The economy has just entered its 93rd month of uninterrupted growth since the trough of the recession in March 1991. This beats the previous longest peacetime expansion in 1982-90; although not yet the record set in the 1960s, when growth was prolonged by defence spending during the Vietnam war. Most economists (and, it would seem, Wall Street investors) still see no sign of recession ahead. Has the business cycle finally been conquered?

The official arbiter of the dates of economic turning-points in America is the National Bureau of Economic Research, in Cambridge, Massachusetts. It pinpoints peaks and troughs in the business cycle by using monthly and quarterly indicators, including GDP, industrial production, retail sales, and employment. The term “cycle” gives the misleading impression of a regular, up-and-down pattern in the economy. Yet cycles come in many different shapes and sizes. Since the second world war, the shortest expansion has lasted only 12 months, the longest, in the 1960s, 106 months. It is this variation that makes downturns so hard to predict.

What is clear, however, is that the economic cycle has become less bumpy than it used to be. Economic expansions have become longer and contractions shorter and shallower (see chart). Victor Zarnowitz, an economist at the Centre for International Business Cycle Research at Columbia University, calculates that between 1854 and 1945 the average expansion lasted 29 months and the average contraction 21 months; but since the war, expansions have lasted almost twice as long, an average of 50 months, while contractions have shortened to an average of only 11 months.

There are several possible explanations for the taming of the business cycle. They include the shift in output from manufacturing to services, which tend to be less cyclical; the bigger role of governments, which, unlike firms, do not slash jobs during recessions; “automatic stabilisers”, such as unemployment benefits, that cushion incomes in downturns; government deposit insurance, which helps to prevent banking crises; and better inventory control through just-in-time techniques and the use of computers.

All these have no doubt helped to moderate economic fluctuations. But some economists go further and argue that globalisation and new technology are easing capacity constraints, holding down inflation and so making it possible to sustain growth into the indefinite future. Yet long business expansions, notes Mr Zarnowitz, have repeatedly generated expectations of never-ending prosperity.

History is, indeed, littered with premature obituaries of the business cycle. In the late 1920s, on the eve of the Depression, there was talk of a new industrial era of rapid, everlasting growth. In the late 1960s, Arthur Okun, an economic adviser to Presidents Kennedy and Johnson, proclaimed that the business cycle was “obsolete”—and the Commerce Department was so confident that it decided to change the name of one of its publications from Business Cycle Developments to Business Conditions Digest. A recession began a year later.

Expansions tend to succumb to one of three assailants. The most common in recent decades is an overheating economy with rising inflation. This forces the Federal Reserve to raise interest rates, which chokes off growth. A second common culprit is an external shock, such as a sharp rise in oil prices, as in the mid-1970s. But inflation, interest rates, and the price of oil are all now low or falling. The usual suspects are not in evidence.

This leaves the third: a financial crash when a speculative bubble bursts. Several unsustainable imbalances are evident today in America: a negative savings rate as consumers shop till they drop, and an unusually high level of investment, which has been growing at its fastest rate since the 1920s. Both have been fuelled by cheap credit and big gains in equity prices.

It is possible that these excesses could unwind gently, causing a slowdown rather than a slump. But this would require a lot of luck, especially against a background of falling profits. If share prices tumble, consumer spending and investment may fall.

Should America’s expansion continue for another year or so, it will become the longest in history, beating even that in the 1960s. The bigger risk, however, is that it will enter the history books with a less happy ending.

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