Summing Up: Is the Current US Economic Expansion Primarily in the Hands of the Fed?
New applications of technology and the expansion of the service economy may contribute to prolonged economic expansion. But they represent just two of many other influences. In particular, Fed policies will be very important in determining the length of the current US economic expansion. Those were the messages from responses to this month’s column.
Steve Adcock was optimistic about the influences of technology and services on economic cycles. As he put it, “these are overlooked forces shielding [us] … from economic downturns, and these forces are the new economy.” Jacob Navon’s comment was more cautious. “I am willing to believe that technology plus the shift to services combined with a very benevolent Fed through the period may have lengthened the average expansion period, as we have witnessed, but NO VIRGINIA, the business cycle is not dead.”
Others cited forces that, by implication, appeared to weight more heavily as influences on expansion. They included continued reasonable increases in business earnings in relation to seemingly sustainable consumption rates and whether or nor the trade war continues (TonyO), leadership or lack thereof (Harry White), actions by the current US administration to encourage firms to bring jobs home and promulgate “America first” policies (Todd Z.), reduced dependency on foreign oil, and “just enough instability in the world for the world to still steadily look to the US for some sort of leadership” (Phillippe Gouamba).
Actions by the Federal Reserve appeared to weigh-in more heavily than other factors in the thinking of several respondents. Keckjr_showme’s commented, “To be as blunt as possible: Economic expansions do not pass away of old age or take their own lives. They die in only one way. The Fed kills them.”
Do you agree? Is the current US economic expansion primarily in the hands of the Fed? What do you think?
Original Column
There is a near-obsession with the idea that a recession has to be imminent, either next year or in 2021, given the length of the economic recovery from the depths of 2008. But are several basic forces at work that put the notion of an imminent recession to rest?
In the early 1960s, in a class on business logistics at The Ohio State University, I ran an experiment in which class members managed inventory at various levels—retailing, wholesale, and manufacturing—in a distribution channel. One objective was to demonstrate the wide swings in inventory levels that resulted when student “managers” over-adjusted to stockouts or inventory gluts. Next, I allowed managers at various levels in the channel to communicate with each other at will, then repeated the experiment. The result of increased communication was a significant reduction in inventory swings. The paper resulting from that experiment (and probably a lot of other research and writing) helped get me an offer of a faculty appointment at Harvard Business School.
The experiment was typical of thinking in those days: If only we had better ways of communicating, especially better ways of tracking customer preferences and demand. Now we do.
Another notion prevalent in those days was that of the “total cost curve.” It illustrated the trade-off between distribution and inventory costs. The faster, more dependable (and more expensive) the distribution method employed, the lower the inventory cost incurred. If only we had more dependable and lower cost distribution based on better information. Now we do, thanks to the Japanese concept of “just in time” inventory management that led to greater speed and dependability among manufacturers and suppliers of logistics services to companies like Toyota and others. Of course, the concept was facilitated by the internet.
What in fact has happened is a convergence of much faster, more dependable distribution with internet-enabled inventory control extending all the way into consumer households and businesses. The result is that inventory value in relation to sales in the United States has fallen by more than 50 percent since 1950. That’s a big deal. Further, inventory fluctuations have flattened significantly.
The Ohio State University is located in Columbus, Ohio, one of the most rapidly developing major cities in the US. In addition to the University, Columbus is home to the Ohio state capitol as well as major banking and insurance companies—all recession-resistant institutions. As a result, over the years, Columbus has been practically recession proof. It is a reflection of the fact that the US gross domestic product devoted to services has risen from 42 percent in 1950 to 62 percent today. Services as a whole have a reputation for being less cyclical than other types of commercial activity. Further, they require comparatively little inventory, eliminating another source of inventory fluctuations.
There are of course many factors and interactions contributing to a recession—tax structures, monetary policies, trade relationships, consumer and business spending and investment, etc. Economies don’t exist in a vacuum, although the US economy is perhaps more self-contained than the economies of other countries. But have we significantly reduced the potential impact of several causes of severe economic downturns? If so, do we have a partial explanation for why the current economic expansion just hit 122 months, an all-time record? Are overlooked economic forces shielding us from severe cycles? What do you think?
Reference:
Justin Fox, “The Problem When Inventory Is Not a Problem,” Bloomberg Businessweek, August 12, 2019, p. 68.