How Much Longer Will the Expansion Last?

The latest economic expansion, which began June 2009, celebrated its eighth birthday this month. It also hit another milestone in recent months, when it became the third longest expansion since World War II, exceeding the length of the 92-month expansion that started in November 1982. So, what does this mean for the expansion moving forward?

As we have indicated in the past, we don’t believe that expansions die of old age. Rather, they die of excesses. As noted in our Midyear Outlook 2017: A Shift in Market Control publication, the economy has experienced a slow and steady trajectory throughout the expansion, and this slower pace may actually lessen the potential for economic excesses; a theory that is corroborated by readings for levels of spending, confidence, and borrowing as measured by the LPL Research Over Index.

Despite a weak first quarter where gross domestic product (GDP) growth came in at a disappointing 1.2%, we continue to look for the U.S. economy to expand near 2.5% in 2017 with potential for further acceleration in 2018. Although potential delays in passing major fiscal policies introduce some risk to the downside, our optimism stems from:

  • Recent data on consumption, employment, housing, manufacturing, and services all pointing toward potential improvement in the months and quarters ahead.
  • Continued job growth and moderate wage gains that may allow for consumption growth without the need for an accommodative central bank.
  • Anticipated fiscal legislation that may provide further incentives for businesses to take economic risks, such as investing in property, plant, and equipment, to position for future growth.

Potential risks to our outlook include:

  • “Soft data,” such as consumer and business confidence measures, need to translate into stronger “hard data” (actual measures of economic activity).
  • Continued strength in business spending will be needed to drive productivity growth, which is key to sustainable long-term economic growth.

Fiscal policy could also enable government spending to help drive GDP, while the Federal Reserve’s tightening of monetary policy may limit upward pressure on the U.S. dollar, mitigating the potential for currency gains to interfere with export growth (a stronger U.S. dollar makes domestic goods more expensive for foreign buyers). Also, global GDP growth has been trending positive in 2017, and further improvements could benefit the U.S. economy by boosting exports.

Fiscal and monetary policy, coupled with recent economic trends, suggest our beginning-of-year forecast for near 2.5% GDP growth in 2017 remains reasonable.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

To complete the Over Index, LPL Research measures trends in three broad economic drivers: spending, borrowing, and confidence. For each of these three drivers, we found four diverse components that reflect the economic activity of that sub-index from a different angle. The Over Index takes each of the subcomponents and uses a sophisticated statistical process to normalize and index each data series into an overall score for each of the three drivers. The combined aggregated data helps to measure the likelihood that the economy is showing signs of overactivity and that we may be approaching a cyclical peak.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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