U.S. Recession Watch: The Six-Cycle Forecast - Part I

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It’s usually a bad idea to stand too close to something—whether an object, a problem you’d like to solve or any number of other things—which could mean seeing all of the pixels but none of the patterns. That’s why we populate albums, frames and holiday cards with bird’s eye views and sweeping vistas. It’s why every city that aspires to “destination” status advertises this or that Tower, Arch, Needle or Eye.

But if we look from too far away, we run a different risk of missing important information. That’s why we send probes, ships and occasionally scientists into outer space. It’s why we don’t Facetime our doctors, we hop on the examination table and show them exactly what’s bothering us.

Now hold those thoughts for a second except the last one—when I segue to economics momentarily, it’ll be from the medical field. But instead of being the patient lying on the examination table, imagine you’re the physician standing alongside it. That means you’re an expert on bodily systems—respiratory, circulatory, nervous, digestive, immune and so on—and you use that knowledge to diagnose the symptoms your patient describes. In other words, the key to your diagnosis is your understanding of the systems and how they interact.

So the connection to economics is this: the economy, too, consists of a mish-mash of interacting systems, or if we’re interested in forecasting, we should think of cycles. But I’m not referring to the capital-B, capital-C Business Cycle as a uniform force—that would be the too-far-away view. I mean the component cycles that are easier to monitor and conceptualize. Component cycles relate to the overall economy in the same way that bodily systems relate to overall health. And like bodily systems, component cycles interconnect while also operating with a degree of autonomy. Therefore, we should choose vantage points that allow us to see the patterns mapped by each one. Our ideal positioning isn’t too close (all anecdotes, no distinguishable patterns), but it isn’t too far away, either.

The Map

I’ve argued that six component cycles demand our attention and should be in clear sight both individually and collectively. Here are my big six:

  • Core business cycle
  • Business credit cycle
  • Stock price cycle
  • Household credit cycle
  • Home building cycle
  • House price cycle

When two or more of these cycles push in the same direction, they reinforce each other and strengthen the economy’s momentum. When they pull in different directions, their relative strength determines the economy’s eventual path. And the potential push–pull combinations are numerous, meaning that patterns change over time. In the 2008–9 recession, for example, the home building and house price cycles began to deteriorate well before the core business cycle. By comparison, the 2001 recession began in the business credit and stock price cycles.

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