Premature Sigh Of Relief

Table of Contents

With the most recent personal income and personal consumption data, the Aggregate Coincident Index declined in May to a growth rate of 1.2%. As a reminder, the Aggregate Coincident Index comes from the six monthly NBER business cycle variables and is used to define the overall business cycle as the blended basket is more reliable than singular measures like real GDP.

The economy has continued to decelerate, but the pace of decline has been minimal over the last seven months, declining from 1.4% to just 1.2%.

The Cyclical Economy defined by construction and manufacturing is also showing a declining growth rate, falling from 7% at the start of 2022 to just 1% as of May.

The Leading Economy started to contract over a year ago, signaling the downturn in growth that we’ve seen in the Cyclical and Aggregate Coincident Indexes.

There is no upturn yet in the collective growth rate of a broad basket of Leading Indicators, and as a result, we have to continue assuming the Coincident Indexes will remain on this downward trend, eventually reaching contraction.

It is historically quite unusual to see Coincident Indexes, specifically the Cyclical Economy, avoid contraction after 13 months of persistent contraction in the Leading Economy.

Scanning back through history for periods when the Leading Index was negative and both the Cyclical and Aggregate Coincident Indexes were less than 1.5% shows a very tight overlap with recessionary periods, which has been a driving force behind the view that the economy is either in recession or entering a recession.

The reason the Coincident Indicators are not yet contracting is not because of output but rather employment.

If we look at real GDP data, we can break the report into three buckets: Cyclical GDP, Real Final Sales, and Non-Cyclical GDP.

Cyclical GDP is the sum of residential fixed investment, durable goods consumption, and business equipment investment. Noncyclical GDP is the difference between Real Final Sales and Cyclical GDP.

The Cyclical Economy has been in contraction for four consecutive quarters, which is uncommon outside recessionary or pre-recessionary periods.

Non-Cyclical GDP is accelerating, but that is not abnormal in early recessionary periods, like 2008.

What’s important is the sequence or order. All downturns will start with the red line, Cyclical GDP, and then move to the blue line, Real Final Sales, and lastly, the black line, Non-Cyclical GDP.

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Eric Basmajian is an economic researcher focused on providing an advanced and comprehensive analysis of the business cycle.

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