EcoTV: In the US, current expansion has entered its 121th month, beating the previous record, which was set in the 90s when Bill Clinton was president. Beyond their length, there are other similarities between the two expansions.


William de Vijlder July 2019



William De Vijlder : Hello.

William De Vijlder: Hello, François.

François Doux: The previous record of 120 months was set during the Clinton administration. What was the situation like back in the 1990s?

William De Vijlder: The great expansion of the 1990s followed on the heels of a recession that was marked by the Iraqi invasion of Kuwait and soaring oil prices. The recession was followed by a long expansion phase with a few key highlights, notably the Fed’s very sharp interest rate hikes in 1994, which triggered a bond market crash. The economy held up marvellously well despite this crash.

François Doux: We would like to understand some of the early warning signals before a recession begins. Let’s talk about the similarities between the two growth cycles. Strong equity markets?

William De Vijlder: Stronger and stronger. In the second half of the 1990s, the equity market boom was absolutely spectacular.

François Doux: Even stronger than today?

William De Vijlder: Much stronger than today. In the 1990s, equity indexes rose 4-fold over the previous cycle’s high. More importantly, job creations triggered a very sharp decline in the unemployment rate. If there is one point worth celebrating today, it’s low unemployment. Although unemployment rose much faster during the 2008-09 recession than in 1990-1991, the jobless rate is now even lower than it was in the 1990s.

François Doux: Let’s talk about the differences between the two strong expansion cycles. As an economist, you examine the strong transformation of the US economy. There was not the same level of transformation, was there?

William De Vijlder: There was a major transformation in the second half of the 1990s. It was the era of telecommunications, media and technology in general. In the end, this gave rise to the bubble, with stock market listings for numerous companies that were not generating earnings. Another striking point is that monetary policy was more aggressive in the 1990s, unlike the current cycle, which is marked by extreme caution. Why? Because the Fed was afraid of prematurely halting its accommodating policy, of “cutting short the recovery”.

François Doux: Let’s talk now about the end of the party.

William De Vijlder: The end of the party

François Doux: The moment when the economy dips into recession. Let’s begin by looking at the housing market. It also had an impact at the end of the previous cycle?

William De Vijlder: Yes, it did. The US economy entered recession in spring 2001. In hindsight, one factor analysts point to is the sharp downturn in the housing market, new home constructions, and the like. It can be linked to monetary tightening. Once again, the Fed has tightened the screws. This is having a considerable impact on the housing market today.

One similarity is that the housing market has made a negative contribution to GDP growth over the past 5 quarters.

François Doux: What about the dollar, William?

William De Vijlder: The dollar played a big role in 2000 and 2001. Why? Because a stronger dollar relative to the currencies of its trading partners sharply curtailed export growth. What grabs our attention today is that the dollar has strengthened over the past 12 to 18 months. We can see its impact in the ISM surveys, for example, and in export order books.

François Doux: The next to last criteria: investment.

William De Vijlder: Investment was an important factor in 2001. It was not really the bursting of the dot-com bubble — although that surely had an impact. No, companies finally understood that times had changed, that they needed to be more cautious. What do we see today? Federal Reserve surveys show that companies are becoming more cautious again, due to the uncertainty created by the trade war.

François Doux: This brings us to our final criteria: world trade. It had an impact in 2001, and today it is back in the headlines again.

William De Vijlder: That’s right. A key factor in 2001 was the slowdown in world trade and the stagnant economic growth of our trading partners.

Yet there was also the prospect of China joining the World Trade Organisation (WTO), with the high hopes that created. Currently, the situation is the exact opposite. One common point is the very sharp slowdown in world trade, but China is no longer seen as a trading partner that can lend a helping hand, but rather – the word “partner” no longer seems appropriate – a player or rival with whom there are perpetual conflicts.

François Doux: To conclude, William De Vijlder, in 2000-2001, we slipped into recession without really noticing that the party was over. Midway through the current year, everyone seems to be asking when will it all end? Is this another difference between the two cycles?

William De Vijlder: Yes, it is.

In fact, it’s the only thing that everyone is talking about. It can be traced to the concern that business leaders expressed in recent surveys. Their concern caught the Fed’s attention. For this reason, we welcome the Fed’s decision to change its tone and to open the door to monetary easing. One lesson to learn is that trade disputes need to be resolved swiftly. It will take more than interest rate cuts to resolve the problems originating from the trade war.