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Interview: Cyclical Outlook vs. Structural Problems

Over emphasizing each data point, whipsaws expectations.

Just because a U.S. recession isn’t right at hand, doesn’t mean it’s off the table.

There’s been an over emphasizing of monthly and quarterly data gyrations that is whipsawing expectations. Based on the “latest” data, at the beginning of the year people were scared of an imminent recession, and then, following the June jobs report, an economic reacceleration is expected.

Instead, ECRI looks at the cyclical vector, and that has been unwavering.

For example, year-over-year (yoy) payroll job growth is still in a cyclical downturn that began a year and a half ago, and remains near a 27-month low.

And even if Q2 GDP comes in at 2 or 2.5%, yoy GDP growth would remain in a cyclical downturn, approaching a 3-yr low.

ECRI’s coincident index, which is a broad summary measure of economic activity, has been locked in a clear cyclical downturn, and its growth rate is near a 28-month low.

That unwavering downward cyclical vector is why we warned last summer that the Fed’s rate hike plans were on collision course with the economic cycle.

Based on our cyclical leading indexes, our view last year was 180 degrees from FOMC and consensus expectations, so we knew that a series of rate hikes was a non-starter.

I believe that the lack of a forward-looking cyclical perspective is why this attempt at a rate hike cycle has been so exceptionally ill-timed.

The December hike came a full year inside of a cycle slowdown – the longest lag ever seen between the start of a cyclical slowdown and the beginning of a Fed rate hike cycle.

And now, even if they hiked rates this morning, we’d have the longest lag ever between the first and second Fed rate hikes.

Clearly, the Fed is struggling with its understanding of why it’s been unable to hike rates as planned.

This is because they don’t have a forward-looking cyclical framework.

The second issue is that they’re only now acknowledging what ECRI has been arguing for eight years, since the summer of 2008, which is a long-term structural decline in trend growth going back at least to the 1970s.

And that’s why the dot plot for the out-years has recently come down so much.

ECRI has had unique view that informs the policy debate. We’ve laid it out in a soon to be published paper, a preview of which is now available in working paper form.

Cutting to the punch-line, whatever the policy prescription, to be successful it must improve demographics or productivity growth.

So where does the U.S. economy go from here?

Based on our forward-looking data, the slowdown will continue for now.

It will eventually end in either a “soft landing,” meaning a reacceleration in growth without the economy dipping into a recession, or a

recessionary “hard landing” – neither is at hand right now.

But, unless a growth rate cycle upturn begins to take shape, its next move may end up being a rate cut.

ECRI’s U.S. Future Inflation Gauge is in an upswing.

Given structural lowflation and a cyclical upswing in inflation, along with a slowdown in growth, the economy will stay in the grip of "stagflation lite."

How about the global economic outlook?

Whereas the U.S. cycle slowdown is a year and a half old, the Eurozone cycle downturn actually started late last year, well before the Brexit vote.

Looking more globally, every major economy is in cyclical slowdown, but not in recession.


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