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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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'Ancient History' Cannot Deny Cycle Upturn


To begin with, what Dimon’s talking about is not just old news, it’s practically ancient, and we’ve known and written about it for many years. 

More importantly, it conflates long-term structural problems with the nearer-term cyclical outlook, which remains the best it’s been in years.

U.S. economic growth has been in a cyclical upturn since mid-2016:
GDP (yoy) growth is at one-year high
IP (yoy) growth is at 1½-year high
Job growth is solid
 
And the reflationary upturn has been underway even longer.

Moreover, the U.S. economy has a good tailwind from rising global growth.

Our leading indexes of economic growth and inflation saw these upturns coming, and they’re still looking good.

This cyclical outlook is why the Fed is finally able to implement a full-fledged rate hike cycle.
 
Structurally, it’s the simple math that ECRI has long highlighted; the economy’s potential depends on productivity growth and demographics.

With regard to weak productivity, deregulation and tax reform can help, but investment, including government infrastructure spending, is crucial. To take advantage of productivity enhancing investment, we also need workers with the right skills.

What is unusual about this cycle is that the inflation upturn started before the growth upturn, so real GDP and real income growth are being undercut more than usual by rising inflation. Somewhat ironically, in 2014, “non-existent” real wage growth was used as an excuse not to raise rates, but today we see the same, yet the Fed is in the midst of a rate hike cycle.

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