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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Let the Good Times Roll -- For Now


This year should mark another year of growth in the United States. That is hardly remarkable. What is remarkable, and perhaps unappreciated, is that growth has become the norm for the American economy.

Consider this factoid: In the last 22 years, the United States has spent just 16 months in recession. Put another way, the economy has been in an expansion mode for 249 of the last 265 months. That ratio of good times to bad times is unprecedented in American history.

In the late 19th century, there was a recession every 15 minutes. Actually, according to the National Bureau of Economic Research, the typical expansion in the second half of the 19th century lasted just 27 months, followed by a recession that lasted 22 months.
Economic life has become steadily less volatile since then, but the last two decades have been the smoothest ever.

What accounts for the prosperity streak? Economists attribute the good times to:

The shift to a service from a manufacturing economy. People who make things need to keep inventory on hand. When demand slows, producers get stuck with excess inventory, a situation that triggers a vicious cycle of price cuts, production cuts, and job cuts all along the supply chain. Service companies have their ups and downs, but because they don't need inventory, the swings tend to be more muted.

Better information. Once upon a time, companies had a hard time gauging demand for their products. Today, thanks to computers, they can find out how their goods are selling in real time. The result: It is far less likely firms will get stuck with big piles of unwanted products. Better information is also available to policy-makers, including the Federal Reserve, which allows them to make smarter and more timely decisions.

An increased reliance on free markets. We live in a market-driven world. For individuals that can be scary, because jobs and companies can disappear quickly. For the economy as a whole, however, free markets have produced flexibility and efficiency. In the labor market, a greater willingness to cut jobs, coupled with a growing use of temporary workers, has led to bigger profits. In the financial markets, the development of a huge market in mortgages has paid multiple dividends. Consumers no longer have to rely on local banks for mortgage money. And during the last recession, these same consumers were able to tap the wealth in their homes by refinancing, another relatively recent development.

Wise policy. Alan Greenspan may not be the "maestro," but he has done a pretty good job running the orchestra. At key points -- the stock market crash of 1987, the Russian crisis of 1998, the recession of 2001 -- Greenspan's aggressive rate cuts prevented bad times from becoming really bad times. In 1994 his preemptive rate hikes helped keep inflation in check...

Good luck. Plunging oil prices in the 1980s made it easier to control inflation. The collapse of Asian economies in the late 1990s -- a disaster for Asia -- also served to hold down inflation and interest rates here...

Recessions are a drag. Even short ones cause pain, especially for those unlucky enough to bear the brunt of them. When it comes to recessions, less is more. But to assume that because we have been on a long winning streak means we will stay on a winning streak is to assume too much. It may even be dangerous.

In his very good book, "Beating the Business Cycle", economist Anirvan Banerji warns that overconfidence about the economy can lead to the next recession. "Once people begin to act on the assumption that recessions are unlikely, they make decisions that are inherently more risky," he writes.
His advice: Enjoy the good times, but don't get complacent.