It's Not an Economic Cycle, It's a 'Fed Cycle'

I haven't done this update for awhile, but the Weekly Leading Index from the Economic Cycle Research Institute (ECRI) continues to indicate a 'V'-shaped recovery for the US economy. The Coincident Index has just come off the lows, while the Lagging Index is doing what it should do and is still in the doldrums. For those not familiar with ECRI's approach, you can check it out here.

click to enlarge

My belief in the validity of these leading indicators is predicated on my belief in cyclicality. While economic cycles are not exactly identical to each other (you could have different levels of employment, inflation, productivity, interest rates), they are still composed of peaks and troughs, and right now, as shown by the Coincident Index above, we are still nearer to the troughs.

On the other hand, the pundits that are touting a "new normal" wherein they see the economy experiencing sub-par growth for years on out (due to the obvious reasons they throw out like a paradigm shift in consumer spending, leverage, etc.) are calling into question this concept of "cyclicality". My response to that is so long as the US Treasury and Fed are running the show, it's the same asset bubble and bust cycle all over again. Some things never change.

Comments

[Dave Wrixon:]

Oh, but you are so wrong! The ability of the FED to do this has been based on the supremacy of the US Dollar. This time around it will all crash and burn as faith in the Might Buck is destroyed once and for all. Even the FED will have to learn that it cannot have its cake and eat it.

Nov 10 08:25 AM

[bob adamson:]

The great paradox, of course, is that a public policy of long term accommodating monetary policy (including maintenance of very low interest rates) coupled with high and growing US Federal budgetary deficits were two of the ongoing factors during the 2002-2008 period that established the groundwork for the cresting of the investment banking crisis in October of 2008 (and the financial, financial credit and general economic collapse this threatened) but that the continuation and enlargement of these very factors (i.e. the stimulus policy) were, arguably, key to stabilizing the economy once this crisis crested and meltdown became a clear and present threat that October.

The great challenge now is to decide when to move beyond efforts to stabilize the economy, what reforms and policy changes should mark this move beyond stabilization and the sequence and timing for these reforms and policy changes to be implemented. Given the paradox described above and the natural prudence of many of us observing the massive extent of the stimulus efforts to date, the desire you and several commentators for an early concrete move by the fiscal and monetary authorities to deflate any and all bubble indications is understandable but should be resisted never the less

Arguably, prudence of a different sort needs to be exercised now. Even at the risk that some inflation will occur, it is vital that the stabilization of the economy and the beginnings of real recovery be solidly based before significant elements of the stimulus policy are reversed; having paid the large price for stimulus it would be tragic to lose its benefits through premature changes to that policy now. Further, there continue to be many more clear evidences of problems with unemployment, underemployment and the housing market than concrete evidence that inflation is presently occurring. Let's therefore not jump the gun.

Nov 10 08:02 PM