It hardly seems fair. The economic party has barely got going, but some people are already wondering if it's winding down.
"Did the U.S. recovery just die without warning?" asks a report last week May 21 from Capital Economics that examined the disappointing conga line of economic data over the past few months. Pavilion Global Markets, another research outfit, chimed in with a note pointing out that recent U.S. expansions have lasted an average of seven years – and this one is just turning six.
The mere fact that smart observers can raise questions about this recovery after yet another record-setting week on Wall Street shows what a strange economy we now inhabit – one where stocks can soar while Main Street idles.
Economic output plateaued during January and February in Canada. In the United States, gross domestic product barely budged during the first quarter and growth is still proceeding at a crawl. The Federal Reserve Bank of Atlanta's GDPNow model predicts that output will expand at a disappointing 0.7 per cent annualized rate during the second quarter.
Yet the stock market is doing just fine. The S&P 500 benchmark for U.S. stocks has been hitting record highs, while the S&P/TSX Composite has risen this year despite the problems in the oil patch.
The only way to square market optimism with economic doldrums is to assume that investors are seeing much better times ahead – or, at least, no big problems. Most forecasters contend that the recent outburst of lacklustre data, including disappointing reads on manufacturing output and retail sales in April, shouldn't obscure what is fundamentally a positive picture.
"We're very open to the possibility that there is a real slowdown developing in the U.S. economy," writes Paul Ashworth of Capital Economics. "But every time we consider it, we come back to the same simple question: Why?"
He argues there has been no shock big enough to offset the forces of recovery. Brutal winter weather in the U.S. Northeast and hard times in the shale oil industry account for most of the first-quarter pain. Growth will rebound strongly in the second quarter, he predicts, and the U.S. economy will grow 2.8 per cent both this year and next.
"It's true this expansion is now a relatively mature six years old, but in every other way it looks young," he says. "In particular, investment and durable goods spending don't look bloated, there is still slack in the labour market and wage growth remains muted."
Pavilion Global Markets agrees. It notes that this recovery has been unusual. U.S. consumers spent the first four years after the financial crisis shedding debts, or "deleveraging" in the jargon. The result was "the weakest rebound of all expansions since the early 1970s."
While the muted recovery has disappointed job seekers and business owners, the lack of strong growth has also resulted in less inflationary pressure and easier monetary policy than in past rebounds. As a result, this recovery could last longer than its predecessors, Pavilion says.
Janet Yellen, chief of the U.S. Federal Reserve, painted a similarly encouraging picture Friday. She pointed to rises in the number of job openings and wage increases by giant retailers such as Wal-Mart and Target as evidence of a broadening recovery.
To be sure, nobody is predicting madcap expansion or even particularly robust gains. Ms Yellen referred to projections for modest 2.5 per cent growth this year and next. She reiterated that the Fed may start raising interest rates later this year if the economy continues to strengthen.
The great unknown is how investors will react to what Ms. Yellen promises will be "gradual" rate rises. The researchers at Pavilion note that stock market returns have been the one area to experience a more robust recovery than usual during this economic cycle. With bond yields at record lows, stocks have been the only game in town.
Rising rates and humdrum economic growth might seem to threaten stocks' big gains, but Pavilion argues that long economic cycles, such as the ones from 1982 to 1991 and 1991 to 2001, have typically produced even stronger equity returns. "If the expansion continues as we expect, it would not be abnormal to see the equity rally continue," it concludes.