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Profits Growth Slows with Economy

When I was on this show at the beginning of the year, some thought we were a step away from recession, but ECRI was unequivocally bullish about global economic growth and inflation, because our leading indicators of both inflation and growth had turned up before the election.

Almost six months later, when global central bankers met in Portugal in late June, they had their “mission accomplished” moment, and global bond yields surged. Right after that ECRI did a Bloomberg View piece, titled, “All Signs Point to a Cyclical Slowdown in Inflation,” because even as central bankers were getting more hawkish, our global future inflation gauges (FIG) flagged an inflation downturn underway that the bankers were likely to miss, given their fixation on the Phillips curve.

Reversing our call from January, our latest Bloomberg View piece, explains why U.S. and global growth is as good as it gets, and indeed on the cusp of a downturn. Because of this, a downturn in corporate profits growth is likely, and that’s a problem because of the widely held view on Wall Street that the path of profit growth is central to the stock market’s direction.

Today the Fed admits that inflation has been its biggest puzzle, essentially because inflation is not following the Phillips curve. Of course, at ECRI we’re not puzzled. Unlike the Phillips curve, the FIG totally nailed the inflation cycle upturn last year, and this year’s inflation downturn.

I know you [Kathleen] know all this, because in the 1990s you wrote an article about what Greenspan watches, when the Fed pulled off its only pre-emptive tightening and easing without causing a recession. And, as mentioned, our Bloomberg View piece this summer explained why, based on the FIG, inflation would do just what it has done. 

So the answer to the Fed’s puzzle is hiding in plain sight.


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