The economic recovery that began in 2009 is in the seventh inning and stretching out its stay with no sure sign of when it will end.
Jeff Korzenik, chief investment strategist at Fifth Third Bank, used the baseball analogy—coincidentally on the day after the start of the World Series—to describe the status of the U.S. economy at IBJ’s annual Economic Forecast event at the downtown Marriott Indianapolis.
The economy is still holding strong, despite eight years of expansion, Korzenik said. That’s the second-longest recovery in U.S. history, trailing only the 10-year run from 1991 to 2001.
“Last year, I spoke about the U.S. economy being in the seventh inning of this business cycle,” Korzenik said. “I’m here today to tell you we’re still in the seventh inning, which is good news. The longer it takes to get to the ninth inning, the better off we are.”
Korzenik next year expects more moderate returns in the equity markets and somewhat higher interest rates, with average economic growth ranging from 2.5 percent to 3 percent.
“It’s an economy that’s late-cycle, meaning we’re starting to run against limitations, particularly in the labor market,” he said.
The U.S. unemployment rate declined in September to 4.2 percent, which is close to what’s considered “full employment."
Economic recoveries depend upon a strong workforce to drive them. The challenge for the U.S. economy now, as the recovery nears its final stretch, is finding enough workers to sustain the growth, he said.
Korzenik estimated an additional 1.2 million workers will need to enter the labor force annually to achieve that. Millennials entering the workforce for the first time and immigrants, whether legal or undocumented, are contributing to the total, but not by enough, Korzenik said.
Workers sitting on the sidelines and not actively seeking employment are hindering the growth of the labor pool. But the difficulty is that many have been unemployed for so long that they no longer have the relevant skills needed to jump back in, Korzenik said.
The labor force participation rate, at roughly 63 percent, hasn’t been that low since the 1970s.
Korzenik also noted the nation’s high incarceration rate (0.7 percent) and the growing number of adults abusing opioids and other drugs. Both are contributors to the low labor force participation rate, he said.
He cited a conservative estimate that there are 10 million people in the U.S. who use opioids for non-medicinal purposes. Their ability to participate in the workforce is suspect, to say the least.
“Unemployment is low, in part, because we have taken out what used to be marginal participants in the labor force,” he said. “People who are incarcerated or experimented with drugs, opioid addicts. What we’re left with is a participation pool that’s stronger than typical, so that tends to drive down the natural rate of unemployment.”
The drug crisis has escalated to such an alarming point that President Trump on Thursday is expected to declare it a national emergency, Korzenik said.
In addition, he referred to programs that help ex-convicts re-enter the workforce as powerful and overlooked drivers of economic development.
Turning to the stock market, Korzenik said he didn’t expect it to perform as well next year as it has so far in 2017. The S&P 500 has risen 14 percent since Jan. 1, and the Dow Jones Industrial Average is up 18 percent.
That would be “much more difficult to repeat,” he said. Rather than trying to forecast the next recession and jumping out of the markets, investors instead should reevaluate their risk levels and make sure their portfolios are prepared for recession.