Late-stage expansion could last longer than normal, RBC says

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In the late stages of the longest economic expansion since World War II, the current cycle is uncharted territory, according to a report from RBC Wealth Management.

“While the global economy is in the later stage of current expansion, like the early-cycle and mid-cycle phases before it, this stage could prove to be longer than usual,” according to Kelly Bogdanova, vice president of RBC Wealth Management's Portfolio Advisory Group. “The next recession still looks to be some way off. The economic expansion has further to run, in that monetary conditions remain extremely accommodative.”

Consumers continue to fuel the economy, and “the market has displayed few signs of vulnerability,” she writes in the firm’s Global Insight Outlook. Though the yield curve inverted earlier this year, “unlike past inversions, this one was not signaling a painful tightening of credit conditions in the U.S.,” since “Japanese and European investors and savers were barreling into U.S. treasury bonds, rather than accept deepening negative yields in their home markets.”

While central banks' actions may extend the expansion, Tom Garretson, the firm’s fixed income portfolio strategist, says “it may also eventually become marginally more fragile as a result of these policies.” Investors are again hunting for yield as negative interest rates in some countries are changing “investor behavior and distorting the economic landscape,” he said. “Low interest rates can push savers into taking larger investment risks in an effort to secure some sort of return. Households may also feel compelled to save more rather than less if they are to achieve their retirement objectives in a low-return world.”

While “recession risks are elevated,” should there be a downturn, it “is likely to be shallow," Garretson writes.

On Thursday, Federal Reserve Bank of Minneapolis President Neel Kashkari told the Minnesota Chamber of Commerce that his baseline is “continued growth” with “no recession.”

The issue of trade, tariffs and the uncertainty that creates remains the biggest downside risk to the economy. And the problem is there’s no way to quantify the psychological hit on companies and how long it will be before they resume investing. “We don’t know if it will be a modest hit and we’ll recover or if it will lead to a broader slowdown,” Kashkari said.

Economic indicators released Thursday supported the belief that recession in not imminent. The Conference Board’s Leading Economic Index slipped 0.1% in October, as expected by economists polled by IFR Markets, after falling 0.2% in each of the prior two months. The Coincident Index was flat in the month, after gaining 0.1% in September, and a 0.3% in August. The Lagging Index rose 0.1%, the same as in September, after dropping 0.6% in August.

The index’s “six-month growth rate turned negative for the first time since May 2016,” said Ataman Ozyildirim, senior director of economic research at the think tank. “Taken together, the LEI suggests that the economy will end the year on a weak note, at just below 2 percent growth.”

The Federal Reserve Bank of Philadelphia’s Report on Business’ general business conditions index rose to 10.4 in November from 5.6 in October, while the six months ahead index gained to 35.8 from 33.8.

Economists expected a 7.0 read.

“The survey’s broad indicators remained positive, although their movements were mixed this month: The indicator for general activity increased, but the new orders, shipments, and employment indicators decreased from their readings last month,” the report said. “The survey’s future activity indexes remained positive, suggesting continued optimism about growth for the next six months.”

Existing home sales rose 1.9% in October to a seasonally adjusted annual rate of 5.46 million from 5.36 million a month earlier, and grew 4.6% from the 5.22 million rate a year ago.

Economists forecast a 5.48 million pace.

“Historically-low interest rates, continuing job expansion, higher weekly earnings and low mortgage rates are undoubtedly contributing to these higher numbers,” according to National Association of Realtors Chief Economist Lawrence Yun. “We will likely continue to see sales climb as long as potential buyers are presented with an adequate supply of inventory.”

Initial jobless claims were unchanged at a 227,000 level in the week ended Nov. 16, while continued claims rose to 1.695 million in the week ended Nov. 9 from 1.692 million a week earlier, the Labor Department reported.

Economists expected 220,000 initial and 1.685 million continued claims.

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