Four Years In - Economic Expansion Hanging By a Thread
Key Takeaways:
- Four years since economic expansion started.
- GDP still strong; expansion intact…for now.
- Interest rate are not as tight as past cycles.
- Labor market makes the Fed’s job difficult.
- Mixed economic data but risks remain.
In April 2020, the U.S. economy exited a short but painful recession due to the COVID lockdown. After four years, the question is where are we in the economic cycle? When can the Fed cut rates? In the table below we looked at past expansions and compared the end of those cycles to where we are now.1 Major economic data is showing the Fed a conflicting story as activity has accelerated and data remains stronger than at the end of past cycles when rate cuts are necessary to support growth. Some examples include,
- GDP: The U.S. economy grew 3.4% in 4Q23, much stronger than what growth looks like at the end of a cycle. On average, GDP grows less than 1% at the end of the cycle and justifies rate cuts. However, GDP is expected to grow above the historical average seen at the end of a cycle through 2024.
- Interest rates accommodative: The real Fed funds rate tends to be higher at the end of the cycle as the Fed raises rates to tame inflation. Currently, it is relatively low in a historical context which may warrant the Fed to be on hold for longer.
- Labor market strong: The current unemployment rate is lower than at the end of 8 of the 11 cycles observed. This challenges the view that rate cuts are on the horizon.
- Leading indicators weak: The Leading Indicator Index remains substantially weaker than the end or even during past cycles. This suggests the economy may not be as strong as other data points suggest.
Trough of Prior Cycle | Peak in Expansion | Length of Expansion (Months)* | Median GDP Growth (QoQ %) | GDP Growth (QoQ%) End of Cycle | Median Real Fed Funds Rate (using core CPI YoY%) | Real Fed Funds Rate End of Cycle (using core CPI YoY %) | Median Unemployment Rate | Unemployment Rate End of Cycle | Median Leading Indicators Index (YoY %) | Leading Indicator Index (YoY %) End of Cycle |
Oct-49 | Jul-53 | 45 | 4.30% | -2.20% | NA | NA | 3.20% | 2.60% | NA | NA |
May-54 | Aug-57 | 39 | 3.70% | 4.00% | NA | NA | 4.20% | 4.10% | NA | NA |
Apr-58 | Apr-60 | 24 | 7.90% | -2.10% | 1.20% | 2.00% | 5.70% | 5.20% | NA | 2.80% |
Feb-61 | Dec-69 | 106 | 4.40% | -1.90% | 1.70% | -0.20% | 4.40% | 3.50% | 6.80% | -1.60% |
Nov-70 | Nov-73 | 36 | 3.90% | 3.90% | 2.20% | 4.50% | 5.70% | 4.80% | 7.10% | -1.40% |
Mar-75 | Jan-80 | 58 | 3.00% | 1.30% | -0.20% | 2.00% | 6.90% | 6.30% | 4.70% | -5.50% |
Jul-80 | Jul-81 | 12 | 4.90% | 4.90% | 5.10% | 4.40% | 7.50% | 7.20% | -4.20% | -1.10% |
Nov-82 | Jul-90 | 92 | 3.90% | 0.30% | 3.80% | 3.00% | 6.90% | 5.50% | 4.20% | -1.10% |
Mar-91 | 1-Mar | 120 | 3.60% | -1.30% | 2.70% | 2.30% | 5.50% | 4.30% | 4.50% | -7.50% |
1-Nov | 7-Dec | 73 | 2.50% | 2.50% | -0.10% | 1.90% | 5.40% | 5.00% | 2.70% | -4.10% |
9-Jun | 20-Feb | 128 | 2.30% | -5.30% | -1.50% | -0.70% | 5.80% | 3.50% | 3.80% | -0.70% |
| Median | 52 | 3.90% | 0.30% | 1.70% | 2.00% | 5.70% | 4.80% | 4.40% | -1.40% |
20-Apr | Current | 48 | 3.30% | 3.40% | -1.40% | 1.70% | 3.80% | 3.80% | -3.20% | -6.30% |
THE BOTTOM LINE:
We think the economy is late cycle, despite the recent resumption in growth. While investors want rate cuts, a strong labor market and Fed funds rate that is not too restrictive suggests the Fed may be on hold until 2H24. Leading indicators are the one major data point that suggest a much weaker economy than other indicators suggest.