The four big questions I’ve been thinking about about economics are:
Why don’t we have recessions anymore? National Bureau of Economic Research There is historical data on US expansions and contractions dating back to the 1850s:
Are data from the 19th century as reliable as today’s data? Probably not, but it’s clear that recessions are fewer and farther between than they used to be.1
It seems strange that in the last 17 years we have had only one recession that lasted 2 months and did not involve a credit cycle.
The US economy is much larger, more mature and diverse than it has been in the past. This is also helped by the fact that technology is playing a bigger role and there are more workers in the service sector.
Companies are better managed and more efficient. Policymakers also respond faster when disruptions occur.
Interestingly, less frequent recessions have not eliminated risk from financial markets. There are still bear markets. They were relatively short-lived.
I wonder if there will be greater reactions from investors when the next economic contraction, which we are no longer accustomed to, finally arrives.
Why didn’t the housing market lead to a recession? Some economists have an opinion about housing. like that economy.
Research It shows that housing activity, accounting for about 20% of GDP, has been a key driver of U.S. economic cycles since World War II.
So why isn’t it making a bigger impact now?
Existing home sales have collapsed as mortgage rates have remained above 6% for over 3 years and housing affordability is worse than ever.
It probably helped that housing prices never fell, many people were locked into 3 percent mortgage rates, and the unemployment rate has remained below 5 percent for almost 5 years.
Enough people have low enough mortgage rates and housing wealth to offset the lack of housing activity.
But how long can this last?
I don’t know about this.
Why aren’t rates higher? Inflation is still well above what it was in the last decade. Government debts are astronomically high. Fiscal deficits don’t look like they’re going anywhere in the foreseeable future.
The ratio of government debt to GDP is higher than at any time other than World War II.
Nothing can stop this train.
And yet…
…10-year Treasury yields are well below the average of the last 65 years.
Some people think rates are high today because they’re tied to post-GFC 0 percent interest rates.
But today’s government bond yields (if there is such a thing in the markets) are at a level that I would consider normal.
Bond yields do not align with the idea that government debt is a crisis.
Anyone who predicted a government debt crisis should probably have an answer for this.
Is this a normal economy after all? Consider this fact:
- The US economy is growing at a rate of 2-3 percent.
- Inflation is at 3.5 percent (just above the 100-year average).
- The 10-year return is just under 5%.
- And the US stock market rose 10% in the first half of the year.2
In the 2020s, the economy weathered a pandemic, supply chain shocks, a hot labor market, 9% inflation, a rate hike cycle, tariffs, energy shocks, and multiple wars.
We were in a constant state of flux.
But what if the current situation is normalization?
I can go for it.
It probably won’t last long.
Further Reading:
Sovereign Debt Crisis?
1The average length in months here is from peak to trough.
2OK, 10% of the year might seem more “normal” in terms of long-term averages. But the average gain on the rise is 21%, so we’re on the right track.
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