The business cycle is a tricky animal, as any investing guru will tell you.
These cycles are seen as natural undulations of the economy, and a great deal of literature on the subject of business cycles exists. However, there is no perfect model for how such a cycle plays out. Really, business cycles (and the theories thereof) are a product of observation. Investment experts will dutifully explain that “past performance does not guarantee future results,” but the same qualification should also be given for determining the ebb and flow of current and future business cycles.
What Is the Business Cycle?
In a general sense, the business cycle is simply the ups and downs of the economy. Over time, we typically see alternating periods of economic growth and contraction—times of expansion in economic activity followed by recessions. The main indicator used to determine which of these trends is taking place is known as gross domestic product (GDP), a measure of how much economic output a country is producing as a whole. Some of the main components of GDP are levels of employment, personal incomes, industrial output, and retail sales.
Conventional wisdom points toward business cycles having an average duration of six to eight years. The intermittent recessions that are represented by troughs in the model are the much shorter portion of the cycle, typically lasting only about a year or less. For some context, Wall St has been enjoying a bull market for seven years now following the “Great Recession” of 2007-2009, so we’re likely due to enter another downturn. Worst of all, even though the stock markets have seen fantastic gains during these seven years, productivity, wage gains, and real economic growth have been comparatively poor.
There’s an odd disconnect in the first of these factors: employment. Right now, the national unemployment rate is just 5%, which is considered extremely healthy. However, two other developments are going on at the same time. 1) The labor participation rate, which is a broader measure of how many people are actually active members of the labor force, remains mired at its lowest level in over four decades. 2) In general, the sentiment among the public is that the labor market is in far worse shape than the headline numbers would indicate.
What we’re seeing in regard to employment is that the drop in unemployment has come at the expense of real living standards. Nearly all of the growth has been in the lowest-wage jobs in the service sector.
Making Educated Guesses
Given the weak productivity (economic output per capita, essentially) and disproportionate job growth on the low end, it seems a bit dubious to describe the expansion portion of the current business cycle as a “recovery.” If the past seven years have been the good part, what can be expected from the recession that follows?
Many of the developed world’s economic leaders are preaching about the “new normal” of sluggish growth. This has been the case in China, the U.S., and Europe; perhaps Japan is the best example, however. For a full three “lost” decades, the world’s third-largest economy (and it was only recently supplanted by China for second place) has experienced virtually zero growth. This example of being mired in stagnation does not portend well for the rest of the world, either. Unfortunately, the best guess of many forecasters is that such a state of low growth is exactly what we can expect.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.