Recession or Not, There Will Be pain

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This was originally posted on the Economic Policy Institute’s Working Economics Blog.

If the current economic expansion which began in June 2009 makes it to this July, it will set a record for the longest period of U.S. economic growth—beating the 1991 to 2001 boom. Economic expansions don’t die of old age, however, so what might bring this one to an end?

With memories of 2008-2009 still fresh, some observers have focused on corporate debt as the likely culprit. It’s true that corporate debt has risen rapidly during the expansion, both in absolute terms and in relation to corporate profits. But low interest rates mean that debt service—interest payments on this debt relative to after-tax profit—is about 25 percent, where it usually is during periods of expansion and not a cause for worry. Bank regulators are concerned about the rapid growth of leveraged loans and weaker lender protections. But they appear to be correct in their assessment that leveraged lending, despite a 20 percent growth since last year to almost $1.2 trillion, “isn’t a current threat to the financial system.”

Still, recession or no recession, there will be pain.

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