Why this Economic Cycle Presents Unprecedented Challenges

A Confluence of Unique Circumstances Creates a Two-Speed Economy that Defies Easy Categorization.

Every economic cycle is different, but the current cycle presents particularly unique challenges. Mark Twain once famously said, "history doesn't repeat itself, but it often rhymes," and while this sentiment rings true, this economic cycle is proving to be particularly difficult to categorize.

Challenging to Categorize

Depending on which economic indicators one looks at, the US economy could be classified as being in any one of the business cycle's four phases: expansion, slowdown, recession, and recovery. If we use the traditional definition of a recession, which is two consecutive quarters of negative real GDP growth, the US is currently in a recession. However, the unemployment rate, which typically increases during recessions, is at a multi-decade low. This low rate of unemployment indicates an economy in the expansion phase, although it is operating at full capacity.

Other economic indicators, such as deteriorating business surveys and the accelerating rate of inflation, suggest an economy experiencing stagflation, a particularly difficult type of slowdown. The sharp de-rating of US equities seen this year also aligns with stagflation. As such, this economic cycle cannot be easily categorized.

A Two-Speed Economy

Unique circumstances have created a two-speed economy, with some indicators pointing towards expansion, while others suggest stagflation. As the Federal Reserve continues to raise interest rates, we expect economic indicators to become less contradictory, and we anticipate the US economy to enter a recession next year. Since the post-war period, two consecutive quarters of negative real GDP growth have led to the confirmation of a recession by the National Bureau of Economic Research (NBER), which is the official authority on dating US recessions based on monitoring macroeconomic indicators. However, the NBER has not yet confirmed a recession.

While the US economy is facing unprecedented challenges, such as the difficulty in categorizing its economic cycle, there is no need for premature alarm. Recent disappointing GDP releases, which were distorted by a significant fall in inventories after strong stockpiling in previous quarters, do not signal the end of the current cycle. As such, market strategists should continue to monitor economic indicators closely and avoid making hasty decisions based on incomplete information.