The unemployment rate at 4.7 percent. Employers adding 235,000 workers a month. Consumer confidence at its highest level since 2001. The stock market rallying to new territory. Jobless claims flirting with a 44-year low. Wages finally rising, including for low-income workers. The expansion nearing its 100th month. Things are bound to fall apart soon.
This sentiment has become surprisingly common as the expansion has kept chugging along: President Trump has to face a recession in his first term, right? These things don’t last forever, right? “Trump’s turn,” USA Today warned. “Talk about a poisoned chalice,” quipped Bloomberg. “History shows there’s a 100 percent chance of a recession for Trump,” Yahoo declared.
Recessions do have a way of coming around every six or eight or ten years. But economists caution against confusing the length of an expansion with its maturity, and against conflating historical probabilities with forward-facing predictions. There’s no reason the current spell of growth could not outlast the Trump administration, they say. Expansions don’t die of old age.
“This is a really long expansion,” said Ben Herzon, a senior economist at Macroeconomic Advisers, a St. Louis-based economic research firm. “But the length itself does not tell us anything about the likelihood of a recession in the next year, or five years.”
This expansion has gone on for unusually long, by any number of measuring sticks. It has lasted twice as long as the average expansion since 1919. Just two postwar expansions have lasted longer, and not by much: There was the decade-long spell of growth that ended in 2001, and one eight-year stretch in the 1960s.
On top of that, Republicans have tended to see the economy tank shortly after coming into office. “Historically, every Republican president since Teddy Roosevelt has experienced a recession in their first term in office,” said Sam Stovall, the chief investment strategist at CFRA, an equity research group. “Every Republican president except one has had the recession take place in the first two years.” And nearly all modern-day presidents have faced one during their time in the Oval Office, including Barack Obama, George W. Bush, George H.W. Bush, Ronald Reagan, Jimmy Carter, and Gerald Ford. (Bill Clinton snuck out just in time.)
That said, there is no evidence that time itself kills economic growth. People seem to think of expansions as being like human bodies, developing problems as the years accumulate and thus naturally becoming more and more likely to perish. “Assorted imbalances and rigidities accumulate that hobble the economy and make it more fragile,” wrote Glenn Rudebusch, an economist at the Federal Reserve Bank of San Francisco, in an analysis published last year. “Thus, the recovery could be jeopardized by ever smaller shocks, and it becomes more likely over time that the economy will fall into recession.”
It turns out, he found, that this used to be true. Before World War II, the chance a year-old expansion would end in the next month was less than one in 20, and the chance a five-year-old expansion would end was nearly one in four. But the Great Depression spurred the federal government to enact policies to boost public spending when business and household spending declined, such as the unemployment insurance system. And the Federal Reserve learned how to stop banking panics and bolster lending when the economy slowed.
As a result, after the war, the chance a year-old expansion would end was still less than one in 20—as was that of a five-year-old expansion, roughly speaking. “Expansions, like Peter Pan, endure but never seem to grow old,” Rudebusch concluded.
Still, an economy close to full employment, which the United States seems to be, tends to grow for a shorter period of time than an economy far from it, Herzon said. “It’s not the age, but the maturity, that matters.” (As in so many things.) When the unemployment rate drops low enough to spur inflation—specifically, three-tenths of a percentage point or more below the non-accelerating inflation rate of unemployment, as determined by the Congressional Budget Office—the probability of a recession climbs.
Even then, a probability is not a certainty. Policy matters. Balance sheets matter. Interest rates matter. Business confidence matters. Foreign trade matters. Global growth matters. Tax rates matter. Gas prices matter.
Right now, the markets are soaring in part on the expectation that Trump will slash taxes and enact hundreds of billions of dollars of new spending on infrastructure, the border wall, and the military, among other priorities. If that added to the deficit—and that seems possible, if not necessarily likely—that could boost growth and extend the current period of expansion. Many analysts see something like a 10 or 20 percent chance that the economy will fall into a recession in the coming year.
“I look at the year-over-year percent change in housing starts, the year-over-year change in consumer confidence,” said Stovall, adding a laundry list of other numbers he likes to keep an eye on. “None of those indicators are flashing warning signs in my opinion.”
But the Federal Reserve has started raising interest rates, soaking up some of the cheap money that has contributed to the current stock-market boom. Corporate profits have started stalling or falling—a closely watched metric considered a leading recession indicator. And some economists and analysts have become less sanguine about the state of the recovery, all those amazing headline numbers notwithstanding. “Nobody’s focused on the fact that inflationary pressures are showing up, energy is getting more expensive, and labor costs are going up,” Stephen Fuller of George Mason University told me. “There are headwinds! But nobody’s paying attention because there’s so much noise coming from 1600 Pennsylvania Avenue.” Plus, Trump getting involved in a trade war or disrupting the healthcare market could trigger economic turbulence or an outright contraction.
One thing is certain: If Trump ends up managing a recession, he will have less capacity to fight it than Obama did. Many Republicans in Congress are firmly against dramatically increasing the size of the federal budget and railed against the last stimulus bill. And given that interest rates are so low already, the Federal Reserve would not be able to cut rates by much (though it would have other tools available for loosening monetary policy, such as big asset purchases).
Trump is not fated to face a recession, in other words. But his actions might help land America in one, and he might struggle to get the country out.