- The US economic cycle is six months from becoming the longest on record, which has led investors to question when it may end.
- Nomura has compiled a list of 19 financial metrics which “nearly all suggest we are closer to the end of a cycle”.
- However, while US economic growth will slow next year, the analysts said the current expansion should still have further to run.
It’s now been 112 months and counting since the US economy was last in recession — the second longest streak on record.
Another six months and it will be the longest ever, so the phrase “late cycle” is getting a workout as more investors start questioning when it may come to an end.
But predicting the future path of economic growth is always a fraught exercise, given the number of variables involved.
In view of that, this handy chart from Nomura provides some useful guidance on “late cycle signals”:
For 19 key financial metrics in the US economy, it compares current levels to the long-term average.
Fixed income strategists George Goncalves and Ash Shetty say the data provides a “gauge of where we stand versus other cycles”.
And as the chart shows, the majority of data points indicate the US economy is approaching the end of the current cycle.
However, although Nomura’s economics team is forecasting a slowdown in growth next year, “they do not forecast an imminent conclusion of the cycle yet”, the pair said.
“From the strategy side, we are more concerned about financial market developments.”
More specifically, how markets will adapt as global central banks continue to steadily tighten monetary policy.
If more late-cycle indicators are flashing red, it could leave the economy exposed to unexpected shocks as financial conditions continue to tighten.
The two analysts highlighted that most of the market-based risk metrics are sitting at the high end of their range.
And that’s cause for concern, “given the last two recessions were in many ways a function of financial accidents gone awry”.
Perhaps of particular note are two metric in the Credit section of the table — “corporate debt as a % of GDP”, and “% of BBB-rated debt in the Investment Grade bond index”.
Both indicators are at the very top of the range — another piece of evidence that the excessive buildup of corporate debt could leave markets exposed.
As the analysts explained, such a scenario is OK for now but it may have the potential to cause nasty surprises down the track.
More broadly though, “from an economic point of view, the US expansion could have more to go”, they concluded.
However, “an economy that seems poised to decelerate could also run the risk of falling into an outright recession if it encounters enough sharp shocks to financial conditions”.
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