Is the Boom-and-Bust Business Cycle Dead?

For much of modern history, even the richest nations have been subject to big perennial upswings and crashes in commercial activity almost as fixed as the four seasons.

Periods of economic growth get overstretched by increased risk-taking. Hiring and investment crest and fall into a contraction as consumer confidence wanes and spending craters. Sales fall, bankruptcies and unemployment rise. Then, in the depths of a recession, debts are settled, panic abates, green shoots appear, and banks begin lending more easily again — fueling a recovery that enables a new upswing.

But a brigade of academic economists and prominent voices on Wall Street are asking if the unruly business cycle they learned in school, and witnessed in practice, has fundamentally morphed into a tamer beast.

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Rick Rieder, who manages about $3 trillion in assets at the investment firm BlackRock, is one of them.

“There is a lot of ink spilled on what type of landing we will see for the U.S. economy,” he wrote in a note to clients last summer — employing the common metaphor for whether the U.S. economy will crash or achieve a “soft landing” of lower inflation, slower growth and mild unemployment.

“But one point to keep in mind,” Rieder continued, “is that satellites don’t land and maybe that is a better analogy for a modern advanced economy” like the United States. In other words, dips in momentum will now happen within a steadier orbit.

And there is some evidence that the current spurt of economic growth may have not just months but several years to run, barring an external disruption (what economists call an “exogenous shock”) or a return of high inflation that prompts the Federal Reserve to push the economy into recession.

“Financial reporters and market strategists often argue about whether we are ‘early-cycle,’ ‘mid-cycle’ or ‘late-cycle,’” David Kelly, the chief global strategist at J.P. Morgan Asset Management, wrote in a March 11 note to investors that closely aligned with Rieder’s “satellite” thesis. “However, these perspectives are based on an outdated model of how the U.S. economy behaves.”

According to the National Bureau of Economic Research, the U.S. economy between the 1850s and the early 1980s experienced 30 recessions lasting an average of 18 months, with intervening periods of economic growth averaging only 33 months.

Helping drive this pattern, Kelly and other economists explain, were highly cyclical industries: Manufacturing and agriculture, now only a fraction of overall output, were once mainstays of the U.S. economy.

Today, manufacturing accounts for about $2.3 trillion of gross domestic product, employs about 12 million people and indirectly supports other local jobs. (Every manufacturing job, for instance, spurs seven to 12 new jobs in related industries, according to a McKinsey estimate.)

But the consumer-driven U.S. economy, mostly made up of services (health care, auto repair, nail salons, customer service, administration and so on), is almost $30 trillion in size. Uptrends and pullbacks in the production of goods have less impact now. The relative stability of total household spending in recent years is a key part of why the United States has avoided a recession.

America’s contemporary economy, Rieder argued in his note to clients, is less vulnerable to the boom-and-bust cycles of old — mainly because its prosperous consumers are service-oriented, less dependent than ever on factories or farms. Consumption spending makes up about 70% of the economy.

“Consumption doesn’t really adjust that dramatically without some major form of economic stress,” he added.

One piece of data in favor of Rieder’s “satellite” theory is the absence of any widespread weakness before the pandemic crippled economies worldwide.

That was consistent with a developing trend: Since the early 1980s, there have been only four recessions, lasting an average of nine months, with economic expansions averaging 104 months.

The current period of job growth is in its 40th month.

“You don’t want to jinx it,” Ann Harrison, the dean of the Haas School of Business at the University of California, Berkeley, said in an interview — noting that peak confidence in economic expansions frequently arrives right before their downfall. (Talk has picked up of a new “Roaring Twenties,” an era that didn’t end well.)

As ever, there are reasons to worry. The emergence and rapid growth of “shadow banks” operating in private markets with little oversight of their lending has concerned many economists and old-school regulators. And a range of industry insiders in commercial real estate say the negative effects of lower office occupancy rates — for local economies and government budgets — have only just begun.

Yet Kelly of J.P. Morgan lists various reasons that periods of U.S. economic growth may be elongated and less chaotic going forward. Federal deposit insurance, introduced after the Depression, sharply reduced bank panics and failures. Vastly improved information on inventory levels among goods-producing businesses, he said, has “tamed” the inventory cycle, preventing mismatches between supply and demand that can cause mass layoffs.

The rise of international trade, Kelly added, can often offset slowing domestic demand since businesses, enabled by the internet, can find customers throughout the globe. And the service sector’s growth, he concluded, has “made the economy more stable and, importantly, less sensitive to interest rates.”

Across the economics profession, many are not feeling as reassured.

When weighing recession risks, Thomas Herndon, a professor of economics at John Jay College of the City University of New York, doesn’t take much long-term solace in the growing sophistication of big business. There are, he said, “many, many, many causes” for downturns — some of which are not directly linked to financial instability.

Herndon noted the work of 20th-century Polish economist Michal Kalecki, who argued that business leaders feel “undermined” by the maintenance of full employment. Using their substantial influence over policy, Kalecki argued, they can help institute restrictive economic policies that bring times of economic expansion to an end and reset them with softer, more tolerable labor power.

And Herndon said he thought old-fashioned “bubble” manias and “credit cycles” remained a danger, too.

Eliminating the long-standing economic cycle would be “the holy grail of central banking,” said James Knightley, chief international economist at ING, the global bank. “The Fed’s willingness to use innovative tools” — like its off-the-cuff creation of lending facilities to keep credit flowing on Main Street and heal bank balance sheets since 2020 — gives it “more levers to wiggle to help reduce the chance of a downturn,” Knightley said.

“Phrases like ‘This time it will be different’” generally have a bad track record, he said. “But maybe it will.”

In several ways, this time has been different so far.

Typically, the housing sector — and its interconnected industries, from construction and home improvement to real estate finance — accounts for nearly 20% of U.S. output. The Federal Reserve has more than quadrupled its interest-rate levels since the spring of 2022, bringing its key policy rate to over 5% from near zero. That drove mortgage rates to unaffordable highs and made financing new home building difficult. And the residential real estate sector, highly sensitive to interest rates, ground to a halt. But the economy as a whole continued to grow.

When in-person services plummeted during the pandemic, e-commerce and goods-buying picked up the slack. By the time millions of households were sated with goods purchases and manufacturing fell off, the in-person economy was reopening and in-person services began a booming recovery.

There are some market analysts, such as Jim Bianco of Bianco Research, who believe that the U.S. economy — in its dynamism, diversity and size — has in some respects begun to resemble the global economy itself, which typically contracts only when colossal shocks to output occur.

The global financial crisis and the COVID-19 pandemic — which were separated by only 10 years and did cause global recessions — show that while rare, such maelstroms can coincidentally occur back to back. So, long expansions are no guarantee. On the flip side, Australia went about three decades without a recession until COVID ended the streak.

Nina Eichacker, a professor of economics at the University of Rhode Island and the author of two recent papers about government responses to crises, cited another influence: a powerful school of thought that government interventions, even amid downturns, add “frictions and inefficiencies to markets” and “make us worse off overall.”

The robust federal response to the pandemic shock was enabled by a general view that it was an act of nature. Future financial stresses are more likely to have villains, which means proposed solutions are more likely to face division in Congress even if unemployment is notably rising.

But Eichacker thinks that those political limits to consensus may soften if this expansion rolls on and public opinion of the hefty federal response that helped foster it grows fonder.

“I am sometimes freaked out by how optimistic I feel about the state of things,” she said. “Economically anyway.”

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