The next 12 to 18 months may mark what is left of the current business cycle. This should not come as a surprise to anyone, as this is one of the longest-running growth cycles in history.¹
The current recovery has been underway since June 2009. Granted we got off to a very slow start, with Gross Domestic Product (GDP) averaging only 2 percent for most of the recovery so far.² Perhaps the sluggishness pushed the typical economic cycle out a little further on the calendar.
A typical business cycle is the natural rise and fall of economic growth that occurs over time. Each business cycle has four phases: expansion, peak, contraction and trough. The last major trough we had is now known as the Great Recession. Since then we have been in expansion and some economists have made a case that we are close to reaching a peak with GDP expected to be in the 4 percent range for 2018.² Once we start the contraction phase you will hear more about a possible recession or trough.
These phases repeat themselves over time. It appears historically that the size of expansion often has a bearing on the size of recession. Many consumers feel that this has been a relatively slow expansion. Depending on where we end up on inflation, interest rates and GDP, it is hard to predict. If things remain sluggish, hopefully this is an indication of a mild recession.
So why are we glued to the GDP number every quarter? Does this help predict the next recession? Remember a recession is identified by two consecutive quarters of negative growth or GDP. And the formula to calculate GDP is consumer and government spending plus private investment and net exports. Since we run a trade deficit in the U.S., the net exports will be a negative number. Since we have fewer workers tied to manufacturing, it is becoming difficult to see that growth measure rise very rapidly.³
Some economists are becoming more dependent on other indicators, such as an inverted yield curve. This is a bit more technical but certainly another component that the Fed watches. When short-term bonds are yielding more than longer-term bonds, the natural curve that measures increases in yields becomes distorted. This can also be a predictor of a possible recession. To put this in investor terms, who would buy a 10-year bond only to earn less than a one- or three-year bond?
The Fed is watching this due to their “double elimination” program currently where they are both increasing interest rates, and releasing bond assets off of their balance sheet. This has never been done before and we don’t know the effects of this on a growing economy.³
So stay tuned and enjoy what is left of the growth phase and watch for late cycle symptoms. We are already seeing the 10-year Treasury yield slide a bit and we certainly have an antsy stock market.
Now if we could just keep that GDP number growing without too much inflation we may enjoy a Goldilocks (not too hot or too cold) economy a bit longer.
1. National Bureau of Economic Research 2.Bureau of Economic Analysis 3. John Mauldin, former CEO of American Bureau of Economics
Patricia Kummer has been a Certified Financial Planner™ for 33 years and is President of Kummer Financial Strategies LLC, an SEC-registered investment adviser with its physical place of business in the State of Colorado. Registration of an investment adviser does not imply a certain level of skill or training. Please visit www.kummerfinancial.com for more information or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Any material discussed is meant for informational purposes only and not a substitute for individual advice. Securities offered through MSEC, LLC, Member FINRA & SIPC, 5700 W. 112th Street, Ste. 500, Overland Park, KS 66211.
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