FIDELITY: Here's Where We Are In The Business Cycle

The U.S. is currently coming down from mid-cycle in the business cycle and will likely stay that way, provided that debt ceiling discussions go smoothly.  This is according to Lisa Embso-Mattingly, an economist at Fidelity Investments.

This means that growth might not be as strong at it was when the U.S. economy went from -3.5% in 2009 to a 3% growth in 2010, she said.  But it will grow.

“2% is the new normal,” she said.

Here’s where the U.S. is on the recession cycle, with respect to Germany, China and Japan, according to a report by Fidelity’s Embso-Mattingly and Dirk Hofschire:

business cycle

Photo: Fidelity Investments

Embso-Mattingly told Business Insider that there are three factors that determine where a country lies on the recession cycle: credit, profit and inventory.

Right now, thanks to the Fed’s “extraordinary” easy money policy, which Embso-Mattingly predicts will continue for a few more quarters, the U.S. is fairly well positioned on the credit cycle.

Corporate profits, however are on the decline. Wall Street analysts have been revising their estimates for fourth quarter earnings growth for the S&P 500 downwards.  And these already low estimates will probably see another downwards revision, according to a report by Morgan Stanley:

“Earnings expectations for 2013 have declined substantially since the start of 2012. 2013 EPS estimates have fallen from $121 at the beginning of 2012 to $114 now. We expect 2013 earnings estimates to weaken further and forecast $99 of EPS—a 1.0% decline in earnings from 2012 (versus consensus expectation of an 11% increase).”

Inventory, however, is in a better position, with supply getting closer to demand. Here’s a chart of the inventory (supply) to sales (demand) ratio from the Federal Reserve Bank of St. Louis which shows exactly that:

Fred inventory

Photo: FRED Economic Data

Most economies spent most of their time mid-cycle, said Embso-Mattingly, which is why it makes sense that the U.S. is likely to continue on this path of slow but steady growth.

Unless policymakers can’t resolve the debt ceiling issue, that is.

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