Question of the Day - 06 August 2017

[Editor’s Note: This answer was written by Deke Castleman, so these are his opinions alone.]

Thinking that a downturn is imminent is a simple matter of economic cycles — another recession is always coming.

From 1919 to 1945, there were six expansion-contraction cycles in which recessions lasted an average of 18 months and expansions 35. From 1945 to today, there were 11 cycles in which recessions lasted an average of 10 months and expansions an average of 57.

The length of the Great Recession was 19 months (from December 2007 to June 2009, according to the official arbiter of these things, the National Bureau of Economic Research); this was double the average for the post-World War II period. The current recovery is 96 months and counting, the third longest expansion period since the end of that war.

If the recovery continues another 10 months through May 2018, 106 months total and again double the average, it will surpass the second-longest expansion period, from 1961 to 1969. Beyond July 2019, the current expansion period would become the number-one longest, beating the 120-month period from 1991 to 2001.

Other indicators of the next recession include low unemployment, loosening credit and rising consumer debt, a coming inverted-yield curve, and of course, the Dynamic Linearly Detrended Aggregate Spread (DAGS).

So, even though we’re now in the sweet spot of an economic cycle that allows us to forget that a crash is even possible, in exactly 24 months, the current cycle would be the longest in nearly 75 years, so it’s not hard to believe that another contraction is “due.” 

As for the effects, I don’t want to sound like Chicken Little and I’m extremely optimistic by nature, but the older I get, the longer my memory stretches, and this run-up sure reminds me of the last one, especially the real estate boom in many places in the country and the dizzying heights, comparatively speaking, of the stock market.

Also, I believe there’s a direct correlation between the market’s growth during the current expansion cycle and the amount of money created by the deliberate expansion policies of almost all the world’s central bankers — piling on debt by printing money and manipulating interest rates (their only two tools, essentially).  

Can the U.S. economy run on its own? With the Federal Reserve raising interest rates, it’s possible we’ll find out sooner than later, but I'm not betting on it.

Finally, because of the continuous manipulations, it’s conceivable that the causes of the Great Recession were never really ameliorated and if that’s the case, the next “correction” could be much more severe than the last one.

This all has obvious implications for Las Vegas. The last recession hit the city harder than most and some studies and surveys still indicate that Las Vegas is well below pre-recession levels (last in home-value recovery, for example). Building and casino expansions have picked up significantly and most revenue numbers are at least approaching their circa 2007 highs. Heck, even the Strip's primary monument to the downturn, the empty and unfinished Fontainebleau on the north Strip, is rumored to be back in play. A recession repeat would stop everything in its tracks.

Considering the stakes, I sincerely hope I’m wrong.