Why this economic cycle is different

Tina Fong, Strategist at Schroders

Unique circumstances mean there are no clear cut lessons from history, making this economic cycle particularly hard to categorise.

No two economic cycles are the same but as the American writer Mark Twain eloquently put it “history doesn't repeat itself, but it often rhymes”. This cycle is proving to be particularly different, however, which makes it even more challenging to draw parallels with the past.

Depending on which indicators you look at, the US economy could be categorised as being in any one of the business cycle’s four phases. These are expansion, slowdown, recession and recovery.

If we use the textbook definition of recession - two consecutive quarters of negative real GDP growth - the US is in one. Recessions, however, are usually accompanied by a meaningful pick-up in the unemployment rate, and this has not occurred.

Instead, the unemployment rate is at a multi-decade low. Indeed, the strength of the labour market speaks of an economy in its expansion phase, albeit now clearly pushing at capacity limits.

Other economic indicators, however, such as business surveys (deteriorating) and the rate of change in inflation (still accelerating), suggest an economy already experiencing that particularly difficult type of slowdown, stagflation. Certainly, the sharp de-rating of US equities seen this year is in keeping with stagflation.

In short, this economic cycle can’t be easily categorised.

Unique circumstances have created two-speed economy

As the rapid pace of rate rises by the Federal Reserve (Fed) continue to take effect we expect economic indicators to become less contradictory. This should occur next year when we anticipate the US economy to be in a recession (see: Why recession looms for the developed world).-

Since the post-war period, every time there has been two consecutive quarters of negative real GDP growth, recession has been confirmed by the NBER (National Bureau of Economic Research). The NBER is the official authority on dating US recessions based on monitoring a variety of macro-economic indicators.

So far, they have not announced recession.

The weakness in second quarter GDP was also distorted by a significant fall in inventories after strong stockpiling in previous quarters. So, it seems premature to call the end of the cycle based on recent disappointing GDP releases.

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