US | Where are we in the business cycle?
Our analysis of key economic indicators suggests on balance the economy is in the mid-cycle phase of the business cycle. We believe the expansion has legs to run in spite of being past peak growth and policy accommodation. This provides ongoing solid underpinning for corporate profits, albeit with more subdued equity market returns. It also signals we have not reached the peak in long-term rates. Still, there are downside risks on the horizon, including the Delta variant.
The pandemic and the massive policy responses have created a unique business cycle, skewing the typical cyclical movement of many key indicators. This has produced disparities across the indicators and striking imbalances between demand and supply across product and labor markets.
The uneven nature of the expansion complicates investors, business leaders, and monetary policymakers’ assessments of where we are in the cycle and renders decisions about the best course of action more difficult.
While the Fed’s new Flexible Average Inflation Targeting (FAIT) framework places increased importance on achieving full employment, reduced labor supply has made achieving this objective more difficult. With inflation in a latecycle phase, there is a risk the Fed could tighten policy prematurely.
Supply/demand imbalances continuing into 2022 is a rising probability. Such prolonged imbalances could stoke higher and longer-lasting inflation than projected currently. However, we believe the subsequent unmooring of inflation expectations is less likely. If we are correct, then the Fed does not need to adopt a more aggressive tightening stance.
Why an ageing population doesn’t mean soaring inflation
What’s the future for inflation? Joachim Nagel, the new president of Germany's central bank, believes the rapidly ageing global population will play a key role – ramping up pressure on prices in the medium term. While we agree slowing labour supply will stifle output growth, in his recent discussion Nagel failed to fully consider the demand side of the argument.Find Out More
Surging global food prices could drive eurozone core inflation higher
Along with energy prices, global food prices have emerged as a key driver of the eurozone's current inflationary surge. Like other advanced economies, eurozone countries tend to be less exposed to global food price fluctuations. But if persistent and combined with strong demand, high food prices could result in a higher pass-through to core inflation.Find Out More