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.
Big shifts are underway in Russia-China trade
Data for Q3 on the volume of China's imports of crude from Russia show a drop against the June level. Rather than an indication that China's demand has peaked, this may be a sign that China is preparing for the Russian oil price cap recently agreed by G7 by shifting some of its purchases to the grey market.Find Out More
Levelling up is unlikely under the Liz Truss government
The government's levelling up ambition has probably been made more, not less, difficult by the new "Plan for Growth". Policies of lower taxes, less regulation, and a smaller state are unlikely to have much beneficial impact on long-term growth at the national level, let alone in those regions with long track records of underperformance.Find Out More