Restrained economic growth inhibits asset bubbles
When speaking about the current economic expansion, few would utter the words, “This time is different.” Many
have regretted saying so in the past.
There are many trends in the current expansion that follow a course that has not quite been the same as what we
saw in previous periods of growth, however. Consider how the securities industry has grown over the years and
what that might say about the current economic cycle.
The chart on this page shows the
growth path of the S&P 500 Index over
the prior three expansions, including the
current one, along with employment
growth in the securities industry for the
same three periods. The graphic clearly
shows that securities-industry employment in the current expansion cycle
(2010 to the present) has not grown in
proportion to the stock market — as it
had during the economic expansions in
the 1990s and early 2000s.
A simple interpretation of the growth
pattern in the past is that the securities industry grew rapidly in a rising
stock-market climate. The industry created financial instruments, including
mortgage-backed securities, and sold
them to investors, riding the stock-market wave.
When the market grew at robust rates in
the past, employment in the securities
industry fed on the optimism that growth would continue at the same rate. So many followed a herd mentality that,
in turn, fostered the asset bubbles that wreaked havoc when they popped. In short, the lack of employment growth
in the securities industry during the current cycle suggests that these businesses are not propagating the same asset
bubbles that the market is susceptible to during periods of economic exuberance.
Perhaps the connection between stock prices and securities-industry employment is a bit simplistic. The variables
affecting the stock market and employment are many, and we usually don’t see the asset bubbles until after they
have popped. Still, the lack of securities-industry employment growth surely has had some effect on keeping the
office market from getting ahead of itself.
According to Reis Inc. statistics, the current office-vacancy rate is a little more than 16 percent, where it has
stagnated for a few years after falling from a high of 17. 8 percent. In the last economic cycle in the early 2000s,
the vacancy rate fell to 12 percent, and it fell below 10 percent in the late 1990s. The current elevated vacancy rate
is not due to an oversupply of office space. It’s a byproduct of developers not having greatly expanded office stock
over the last few years as they did in the 1990s and early 2000s.
At 36 quarters old, the current expansion is only six quarters shy of the time span of the 1990s economic
expansion, which was the longest expansion recorded since the 1960s — based on gross domestic product (GDP)
growth, not stock-market values. The cumulative real GDP growth since 2010 is only 20. 3 percent, at this point.
In the 1990s expansion, the cumulative real GDP growth rate was more than 37 percent.
Thus, the more we see the 2 percent to 2.5 percent GDP growth rates that we have witnessed since 2010,
the more reassuring it seems that we will continue to see the same steady growth rates — which could lead to
the longest economic expansion in decades.
The recent tax overhaul has prompted many to speculate that the economy will finally accelerate, generating
higher job and GDP rates than we have seen in eight years. This could well be the case, but if this growth starts to
fuel higher employment growth in the securities industry, consider yourself forewarned. n
Securities-Industry Employment Vs. S&P 500 Index
By Victor Calanog and Barbara Byrne Denham
Barbara Byrne Denham is an economist in the research and economics
department at Reis Inc. She previously
served as chief economist at Eastern
Consolidated and is a Ph. D. candidate
at New York University, where she
has studied economics, monetary
theory and game theory. Reach her
Victor Calanog is chief economist
and senior vice president for research
at Reis Inc. ( www.reis.com). He writes
a monthly column on property types
for Scotsman Guide. Calanog and his
team of economists are responsible
for data models, forecasting, valuation
and portfolio services for clients in
commercial real estate. Reach him
Source: Reis Inc.
Securities employment growth 1994-1999
Securities employment growth 2004-2008
Securities employment growth 2010-2018
S&P 500 growth 1994-1999
S&P 500 growth 2004-2008
S&P 500 growth 2010-2018
(Months of growth)