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Fast & Furious Business Cycle

Summary:
The current business cycle has been unprecedented. It has been fast and furious so far. Last year’s recession was among the worst in US history, but it lasted just two months. The V-shaped recovery in real GDP has been one of the fastest on record, with real GDP likely to surpass its previous Q4-2019 record high during the current quarter. That means that the full recovery in real GDP lasted five quarters, with the economy now in the expansion phase of the business cycle. Not surprisingly, this remarkable performance has been reflected in the unprecedented V-shaped recovery in corporate earnings, also to record highs, in recent months. That's propelled stock prices to record highs so far this year. Meanwhile, policymakers continue to step on their growth accelerators, hoping that

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The current business cycle has been unprecedented. It has been fast and furious so far. Last year’s recession was among the worst in US history, but it lasted just two months. The V-shaped recovery in real GDP has been one of the fastest on record, with real GDP likely to surpass its previous Q4-2019 record high during the current quarter. That means that the full recovery in real GDP lasted five quarters, with the economy now in the expansion phase of the business cycle.

Not surprisingly, this remarkable performance has been reflected in the unprecedented V-shaped recovery in corporate earnings, also to record highs, in recent months. That's propelled stock prices to record highs so far this year.

Meanwhile, policymakers continue to step on their growth accelerators, hoping that inflation and financial stability remain under control. Monetary policymakers are still purchasing $120 billion per month in fixed-income securities. Some of them are starting to talk about talking about tapering these purchases. Tapering may be months away, and hiking the federal funds rate won't start until at least a few months after tapering is done. The Biden administration is pushing for more spending that will result in trillion dollar annual deficits in coming years even if taxes are raised to cover some of the spending.

Here are some of the most recent fast and furious consequences of all the high-octane fuel provided by the policymakers:

(1) Prices-paid and prices-received indexes. The prices-paid index included in May’s national survey of manufacturing purchasing managers (M-PMI) remained near April’s reading, which was the highest since July 2008 (Fig. 1). That’s not a surprise since the average of the May prices-paid indexes reported in the regional business surveys conducted by five Federal Reserve Banks jumped to the highest reading on record (Fig. 2). The average of the five regional prices-received indexes also jumped to a record high in May. All 10 regional prices-paid and prices-received indexes are at or near record highs (Fig. 3). (The data for the regional surveys start in 2005.)

(2) Backlogs for the record books. May’s national M-PMI survey showed that supplier deliveries and backlog of orders rose to record highs last month (Fig. 4). In addition, the customer inventories index fell to another record low (Fig. 5). The average of the five regional indexes for either unfilled orders or delivery times rose to a record high in May (Fig. 6).

(3) Capital spending. The good news is that the inflationary economic boom is great for corporate profits, which is great for capital spending. The y/y growth rate in weekly S&P 500 forward earnings is an excellent coincident indicator of the y/y growth rate in nondefense capital goods orders excluding aircraft (Fig. 7). Sure enough, the latter measure of capital spending on equipment and machinery jumped 0.9% m/m and 22.0% y/y to a fresh record high during April (Fig. 8).

(4) Bottom line. What the economy is experiencing may simply be a business cycle set to “fast forward” by the insanely stimulative combination of fiscal and monetary policies. We had a terrible recession last year that lasted only two months. Twelve months later, the economy had fully recovered, based on most macroeconomic indicators. Booms usually occur at the tail ends of expansions. This time, one started during the tail end of the recovery and continues at the beginning of the expansion.

That’s all great until it isn’t—because, as we all know, booms are followed by bananas. Economist Alfred Kahn, an economic adviser to former President Jimmy Carter, warned lawmakers in the ’70s that if they didn’t get inflation under control, the nation was heading for a recession or a depression. To avoid scaring the public during his testimony at the Capitol, instead of saying “recession” or “depression,” he simply said “banana.”

Dr. Ed Yardeni
Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research for institutional investors. In this blog, we highlight some of the more interesting relationships and developments that should be of interest to investors. Our premium research service is designed for institutional investors.

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