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Grading the management of the US business cycle

Much has been written about the current US business cycle, much of it negative. Many business writers opine that this expansion is jobless and unbalanced;housing will crash and end in catastrophe . Stocks are overvalued; the vix is too low, etc, etc.

Stocks love to climb a wall of worry and confound the experts. Today we will use this space to talk briefly about what could have been and grade the current business cycle.

What could have been?

Post .com bubble and pre 9/11 we believe that the economy had bottomed June of 2001, based in part on the ECRI weekly leading indicators (WLI). Not the beginning of a robust expansion, but a halt in the decline. After 9/11 the economy was kicked in the teeth. Travel plans cancelled, automotive dealers and model homes were absent of even lookers. For two weeks after 9/11 the economy was frozen and for eight months we virtually stood still. We were looking into the abyss.

After 9/11 we got a healthy dose of both fiscal and monetary stimulus. Classic counter cyclical policy. Correct policy actions. Given the levels of slack within the economy and the uncertainty that prevailed, anything less might have led to a deep recession both in the US and globally. Unemployment might have reached levels not seen since the 80-82 recession. Prices might have tipped into deflationary territory.

Grading the current business cycle

Fast forward to today. In today’s GDP report it is being described as a “disappointment”, “growth is slower than expected.”






Well now. Let’s step back and take a look at the big picture. Nominal GDP growth is up 5.9% for the quarter; well off its peak but above the 10 year average of 5.4%. Not shabby. If that is a disappointment, we’ll take it. Grade: B+

Looking forward

One of the problems we face going forward is that the US Consumer has almost single handedly propped up the global economy via spending. Much of it on housing and with credit. The path we have been on is unsustainable. It reminds me of Mexico post NAFTA. Foreign money flooding in made credit cheaper than ever before. Just before the Peso Crisis the average new car sold in Mexico City had leather and a sunroof. Sound familiar? It should. Look around. The USA is vulnerable like never before to external factors beyond our control, foreign flows of capital.


Dr. Greenspan, the maestro, is trying to wean us off of ultra cheap money. Only he is getting no help from Asia. Asian central banks and enterprises are consistently recycling their trade surpluses with the USA back to the US and into US treasuries. The net effect is that rates are lower than they normally would be a this point in the business cycle and long term rates, both on treasuries and on mortgages are abnormally low versus inflation.

Is disaster certain? No, but we need sustained employment and income growth in order to justify the current asset inflation. The next recession will be built off of this expansion. If the US consumer led the expansion, he/she will lead the next recession.

Now pay attention kids, because here is were it gets interesting.

If demand for “cheap” Asian goods falls in the US because of a consumer recession and Asians recycle a smaller base of trade surplus into US treasuries RATES MAY RISE IN THE NEXT RECESSION. That’s right and the new Chairman of the Federal Reserve Open Market Committee (FOMC) whoever it is may just be a toothless tiger.

Right now we have to walk a fine line between cooling housing down and not killing off employment. If we can do that and maintain a balanced expansion over a number of years maybe we can avoid disaster.

In the meantime, stop, STOP (please: Stop!) leveraging your personal balance sheet off of the appreciation in your home. Just like Tech stocks didn’t run forever without a pause (or decline) neither will home prices appreciate 15%+ a year for the next 5 or 10 years. If they do, who the *&^% will be able to afford to buy a home?

Overall Grade: B-, we have done what we needed to do to avoid a deep recession post 9/11, getting this expansion balanced and durable is the tricky part.

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