Monday, June 22, 2015

The Long Expansion (excerpt)

The Index of Leading Economic Indicators rose 0.7% for the second straight month during May and is just shy of the previous record high during May 2006. Previously, I examined the Index of Coincident Economic Indicators (CEI) for some historical guidance on the longevity of economic expansions. Let’s update the analysis:

(1) It has taken 68 months--from January 2008 through October 2013--for the CEI to fully recover from its severe decline during 2008 and early 2009. The previous five recovery periods averaged 26 months within a range of 19-33 months.

(2) The good news is that the average increase in the CEI following each of those recovery periods through the next peak was 18.6%, over an average period of 65 months within a range of 30-104 months. If we apply these averages to the current cycle, then the CEI would peak in 48 more months, during March 2019, with a substantial gain from here.

(3) For now, let’s just enjoy the fact that the CEI is at a record high, and 4.3% above its previous cyclical high during January 2008. All four components of the CEI (payroll employment, real personal income less transfer payments, industrial production, and real manufacturing and trade sales) are at or near recent record highs.

Of course, this analysis simply establishes a benchmark for the average length of expansions. There is quite a bit of variability around this average. The question is whether current events and projected future developments are likely to trigger a recession well before March 2019 or well after. There are plenty of talking points for the debating team making the pessimistic case. For now, I remain on the optimistic team, and a secular bull, as I have been since March 2009.

Today's Morning Briefing: ‘Gradually’ Is the Word. (1) Yellen waves her magic wand again. (2) Fed’s tightening will be below normal. (3) Kansas City discussions focused on secular bull. (4) Secular stagnation is bullish. (5) Kicking the can down the road beats the alternatives. (6) So what could go wrong? (7) Tightening tantrum ahead? (8) Contrary indicator: the front cover of The Economist. (9) Updating the long expansion story. (10) Wage inflation may be heating up finally, but is that inflationary? (More for subscribers.)

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