This post previously appeared at Macrofugue.
I’ve often pondered the length of this cyclical upswing (2009-) relative to the previous (2003-2007). Here’s what the S&P 500 performance for the two periods compared side-by-side looks like:
If this cycle will not last longer than the previous, then we should be at least be looking into what mid-cycle indications will trigger when it is time to be looking for the end. Here is the Philly composition of Leading Economic Indicators:
I’m also keen on using Real Retail Sales (flattening out) & ISM PMI:
We can see that the PMI showed signs of slowing growth more than a year before, and Real Retail Sales peaked 2 years before the recession officially began in 2008.
How do these things look today?
To start, it looks like I’m not the only one looking at ISM PMI…! This value has recently come off its multi-decade high from several months ago, but is still certainly not flashing the same kind of warning sign that it did in 2006. Real Retail Sales also seems to be showing little signs of stress.
And, of course, let’s not forget the yield curve:
A strong predictor of recession is when the 3mo/10y spread decreases below 1%. At present, it is hovering around 3%, and that is not indicative that the bond market is piling into the long-end, anticipating a decline in rates.
The question, of course, is: has ZIRP broken the yield-curve as a predictor of recessions due to the zero-boundary?
I certainly think the argument could be made that the 10y could certainly sink lower — the Japanese 10y is close to 1% (1.08% as of Friday). Perhaps the largest differentiating factor between the Japanese & American deflation is US is the fact that, despite household deleveraging, the corporate borrowing has increased:
Were this final bastion of hope away from balance sheet recession crumble, the evaporating demand for money would crush yields further. So I think the yield curve is still a valid forecasting tool.