ECRI - Economic Cycle Research Institute

Professional Report Excerpt

Deepening Downturn

Please note that the cyclical swings in USLLI growth were followed by swings in USCI growth. When USLLI growth plunged deep into negative territory and stayed there for some time, it was followed by downturns in USCI growth deep into negative territory (in 1990-91, 2001 and 2008), which characterize business cycle recessions. In each of those instances, the USFIG fell also sharply, showing that recession kills the drivers of inflation – followed by large cuts in the Fed Funds Rate. It is likely to be no different this time.

Note that recessions resulted when USFIG downturns were followed by Fed rate cuts only after long lags (22 months before the 1990-91 recession, eight months before the 2001 recession, and 15 months before the 2008 recession). In contrast, quicker rate cuts (with only a six-month lag in 1995) resulted in a soft landing.

In 2002, the USFIG turned up, but Fed Funds did not follow suit for 28 months, with low rates laying the foundation for the housing boom. It is clear that in mid-2003, when Mr. Greenspan and Mr. Bernanke were being vocal about deflation danger, the USFIG was far from its cyclical lows, underscoring their misperceptions.

In the current cycle, the Fed started cutting rates late, and those cuts didn't feed through to consumers and businesses -- a key reason the recession took hold and shows no signs of going away...