By
Derek Hamilton
July 02, 2024
We recently discussed how we believe the near-term risk of recession may have receded, but does that mean recession risks have been removed indefinitely? We think it would be unwise to make that assumption.
There are four stages of an economic cycle: early cycle, mid cycle, late cycle, and recession. Some investors call these stages, respectively, recovery, expansion, peak, and contraction, and knowing where you are in the economic cycle can be an important input to the investing process. Performance among different asset classes and sectors can vary depending on which stage the economy is in.
We constructed an index that attempts to estimate the current stage, and as you can see from the chart below, we believe the US economy is firmly in the late-cycle stage, which implies it could be near the peak. Why does this matter? A late-cycle economy typically results in an environment of slower economic growth, higher inflation, and higher interest rates. At this stage, the economy is usually at risk of some destabilizing event – whether it be higher interest rates, slowing corporate profits, or some external shock that cannot be as easily absorbed if the economy is seeing an acceleration in economic growth. We believe investors should be aware of this current late cycle stage and watch for signs indicating the cycle could be peaking.
Macquarie Asset Management (MAM) US business cycle indicator
Sources: Macquarie, Macrobond, US Bureau of Economic Analysis (BEA), US Federal Reserve, US Department of Treasury, US Bureau of Labor Statistics (BLS), US Congressional Budget Office (CBO), Federal Reserve Bank of Richmond, US Census Bureau, Conference Board, University of Michigan.
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