The New Moon Economy – February 2019

February brought us the second Supermoon of 2019. It was called the Snow Moon. I have never seen the moon look so big or beautiful.

A new moon is difficult to see because the sun isn’t shining on the moon. When the sun does shine on the moon and we look up, we see a full moon. We can figure out what cycle or phase the moon is in. Phases of the moon are predictable.

Our economy, like the moon, moves in cycles. In economic terms we call it a business cycle.

Economists and people in the financial markets are obsessed with predicting where the economy is in the business cycle. The reason is during every cycle, financial assets like stocks, bonds, real estate, and commodities “behave” differently.

The U.S. economy has been in the expansion stage of the business cycle since June 2009. The only expansion longer than this one occurred from March 1991 to March 2001.

The longer an expansion lasts it makes sense that at some point we will hit a “peak” and the economy will start to slow.

Let’s take a closer look at each of the cycles. This way, we can do what economists do, forecast, or predict the direction of the economy.

Oh yes, we can.

The economy is measured in 5 cycles.

The 5 cycles of the economy are the peak, followed by recession, then trough, recovery, expansion and back to peak.

When the economy is at the peak consumers are spending, companies are hiring, and incomes are rising. The economy is growing. Stocks tend to outperform bonds.

Peaks are followed by a slowdown in growth. Consumer spending slows down, business investment slows down, and the economy shrinks. The slowdown turns into a recession. Recessions vary in terms of severity and length of time.

During a recession investors look to the bond market for safety. Selling stocks to buy bonds causes stock prices to fall and bond prices to rise.

Following a recession is the third phase called the trough. The trough is the waiting period between the end of the recession and the beginning of a recovery.

The fourth phase is the recovery where we start to see signs of life in the economy.

After the recovery is expansion. The economy is growing again, and all is right with the world.

What we know in hindsight is that  data,  models, and opinions touted as fact failed to predict where the economy was in the business cycle at the end of 2007.

Few economists or political pundits were willing to say: “Egads we have reached the summit, get ready for the big slide to the bottom.”

Who wants to be the downer at the party?

What we are looking for in our economic predictions is direction. There is a big difference in believing the economy is still on an upward trajectory versus falling off a cliff.

The big slide to the bottom in 2008-2009 was notable for the precipitous drop in stock prices.

The financial crisis of 2008 -2009 created the longest recession in US economic history. The recession lasted 18 months before the economy began to recover.

When the recovery started in June of 2009 the stock market as measured by the S&P 500 “took off”.

Well, we have been in the air 10 years.

Every calendar year since 2009 the stock market has been positive with some years posting big gains.

Then, in 2018, the market turned . The stock market posted a negative 4.43% for 2018. The Fed paused raising interest rates. Retails sales in December dropped the most in the last 9 years.

The question we need to ask is, did we hit the peak in 2018 and are we headed for a recession?

As much as I love a good set of data, data alone is not enough to predict the next phase of the business cycle.

I have said for some months that I believe the economy is slowing.

Slowing does not mean a recession. Growth (GDP) could drop, from 3% to 2%, but that is not a recession . There are signs though.

We begin to see faults or cracks in the economy. Unemployment begins creeping up. We see signs of inflation (prices increasing) and a decrease in consumer spending.

It is never ONE thing that causes a recession.

And then, there was Amazon versus New York City. This is a newsletter, after all.

I have no data to prove this theory, but the decision by Amazon to drop New York City as a second location for headquarters will lead to unforeseen economic consequences.

Was it economic hubris to say “We don’t need 25,000 jobs, we don’t need billions in revenue, we don’t want the presence of a company we ALL order stuff from, or was it a total lack of understanding of the business cycle?

When  politicians and decisions makers are too comfortable, meaning the economy is pretty good, they see no downside to the decision.

Although Amazon and New York City are one data point in a much larger economy, there is not going to be a make-up after the break- up. No do over. It is one sign that we have reached a peak.
Business cycles do exist. The ability to predict them accurately is not an exact science so we must look up and observe.

When we enter the downside of the business cycle stay calm. Have some cash ready for investing. Good companies effectively “go on sale”. There will be opportunities to invest for the long term.

This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.