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Tags: business | cycle | boom | bust

Back to Old Normal Business Cycle: Boom Followed by Bust

Back to Old Normal Business Cycle: Boom Followed by Bust


Dr. Edward Yardeni By Monday, 23 January 2017 07:30 AM Current | Bio | Archive

After Election Day, Debbie and I wrote that it might have marked the end of the New Normal and the resumption of the Old Normal. Instead of another four to eight years of secular stagnation, the traditional business cycle might make a comeback. Instead of “slower growth for longer,” it might be stronger growth with a boom setting the stage for a bust sooner rather than later.

We still think that the next recession isn’t likely to happen until March 15, 2019 (my birthday), but now we think it might be even more likely to happen around then rather than beyond that date. Previously, we’ve shown that during the past six economic upturns, the “recovery periods” (during which ground lost during the previous recessions was fully regained) averaged 33 months. We based that on the monthly Index of Coincident Economic Indicators (CEI) (Fig. 1). During the “expansion periods,” which followed the recoveries, the CEI rose into record-high territory until the next recession hit. The past five expansion periods lasted 65 months on average. The current expansion period started during November 2013. Using the average of the past five cycles, that would put the next cyclical peak at March 2019.

As we’ve noted in the past, that’s not a forecast but rather a simple benchmark based on the experience of the past five business cycles. The question we’ve addressed is whether the next recession is likely to happen sooner or later than this benchmark, given what we know currently. Since we too were in the slower-growth-for-longer camp prior to Election Day, March 2019 seemed like a reasonably distant time for the start of the next recession. Keep in mind, we first presented this benchmark on March 24, 2015. So far, so good.

Now what? Now that we are all living in Trump World, do we need to alter our outlook? We already did by raising our real GDP growth rate from 2.5% to 3.0% for this year. If Trump’s policies stimulate more growth, then the next recession could occur sooner. However, for now we conclude that a recession in 2019 might be more likely than beyond this benchmark. In other words, we still don’t see a recession this year or next year. With the benefit of hindsight, both the New Normal and its “secular stagnation” implications were more subjective than normative. Consider the following:

(1) Gross. The term “New Normal” was popularized by so-called Bond King Bill Gross starting in 2009. It was a very clever way to convince everyone that bonds would probably outperform stocks for the foreseeable future. Both bonds and stocks have done very well since then. In his 1/10 Investment Outlook, Gross argues that his thesis remains intact:

“The longer term negatives of my ‘New Normal’ and Larry Summer's ‘Secular Stagnation’ may have disappeared from the business front pages of the FT and the NYT, but they have never really gone away--Trump or no Trump. Demographic negatives associated with an aging population, high debt/GDP now more at risk due to rising interest rates, technology displacement of human labor, and finally the deceleration/retreat of globalization pose negative ongoing threats to productivity and therefore GDP growth. Trump's policies may grant a temporary acceleration over the next few years, but a 2% longer term standard is likely in place that will stunt corporate profit growth and slow down risk asset appreciation.”

(2) Summers. “Secular stagnation” was a thesis popularized during 2013 by Harvard Professor Larry Summers--former Treasury Secretary under Bill Clinton and a card-carrying Keynesian. He was promoting more fiscal stimulus to revive growth. Now that Trump has proposed a program of fiscal stimulus, Summers thinks it’s a bad idea. Just last week, he said so at the World Economic Forum in Davos: “The people who will be the victims of populist policies are the lower income and middle class people in whose name the policies are offered.”

(3) Yellen. Apparently, Fed Chair Janet Yellen has also changed her tune on fiscal stimulus since Election Day. Less than a month before that day, Jon Hilsenrath posted a 10/14 WSJ article titled “Yellen Cites Benefits to Running Economy Hot for Some Time.” Here is how Jon reported this story:

“The idea is called hysteresis in economic circles. Weak demand begets weak supply, something Ms. Yellen said--with some careful hedges--might be reversed if demand is boosted. ‘If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market,’ [said] Ms. Yellen. ‘One can certainly identify plausible ways in which this might occur.’”

Then last Thursday, in a 1/19 speech at Stanford University, Yellen opined, “That said, I think that allowing the economy to run markedly and persistently ‘hot’ would be risky and unwise. Waiting too long to remove accommodation could cause inflation expectations to begin ratcheting up, driving actual inflation higher and making it harder to control. The combination of persistently low interest rates and strong labor market conditions could lead to undesirable increases in leverage and other financial imbalances, although such risks would likely take time to emerge. Finally, waiting too long to tighten policy could require the FOMC to eventually raise interest rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”

Yellen actually seemed to already have had second thoughts about fiscal stimulus during her 12/14 press conference when she said: “Well, I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets, but I would judge that the degree of slack has diminished. So I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But, nevertheless, let me be careful that I am not trying to provide advice to the new Administration or to Congress as to what is the appropriate stance of policy.”

(4) Reagan. Funny, but we don’t recall anyone talking about a New Normal or secular stagnation during the 1980s when Ronald Reagan was president. Yet when we line up the peak of the unemployment rate back then, when it rose to 10.8% during the end of 1982, and the peak of 10.0% during October 2009, the declines in both have been remarkably similar (Fig. 2). This leads us to conclude that maybe the New Normal this time was just an Old Normal recovery from a really bad recession. Conservatives can certainly come up with lots of charges that Obama’s policies contributed to the slow-paced recovery. Or maybe it just takes more time than usual to recover from a bad recession.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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Back to Old Normal Business Cycle: Boom Followed by Bust
business, cycle, boom, bust
Monday, 23 January 2017 07:30 AM
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