Too late for a soft landing?

The U.S. economic expansion is 111 months—9 ¼ years—old, and still going strong. Indeed, it has gained momentum recently, helped by superfluous fiscal stimulus. Nor do we see any sign of it ending soon.

The expansion is already the second-longest on record—out of 33 in total since 1850. We expect it to become the longest in 2019; that merely requires lasting past June.

When will it end? Sorry, we don’t have a specific prediction for the endpoint. In other words, we don’t know. However, we do know that employment growth is unsustainably strong, such that the already low unemployment rate is still trending down, raising the likelihood of overheating. In turn, Fed officials are trying to stop the downtrend in the unemployment rate by removing stimulus. We also know that most Fed tightening cycles in recent decades have culminated in recessions. In practice, tightening policy enough to slow growth meaningfully without tipping the economy into recession has been the exception rather than the norm. That said, the 1994-95 tightening cycle resulted in a significant slowdown, rather than a recession; the next recession after the 1994-95 tightening cycle did not start until 2001, following the 1999-2000 tightening cycle. Also, one of the arguments for tightening “gradually” in the current cycle is that officials are trying to avoid the typical hard landing.

Against that backdrop, we can see the meaningful risk of a recession starting as soon as 2020, especially since fiscal stimulus will be fading by then. However, our base case is for the expansion to continue through that year at least. Employment growth will likely have to slow down dramatically, however, which means that GDP growth will likely have to slow significantly as well.

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