Understanding Economic Cycles

It's hard to fathom, but we are back on recession watch. The economy was performing exceptionally well at the start of the year—it was the strongest economy on the planet. But here we are. In just a few months, the economy is struggling with the mounting trade war and haphazard DOGE cuts to government jobs and funding. And this is before the mass deportations get going and the Treasury debt limit drama heats up again. The odds of the economy unraveling into recession in the coming year are uncomfortably high, rising to 35%. In coming posts, I will present the leading indicators I rely most on to determine whether a recession is dead ahead.   Leading indicator #1 – Conference Board survey of consumer confidence. Most times, consumer confidence reflects the economy’s performance – unemployment and inflation – but in the lead-up to recessions, the causality shifts and a sharp decline in confidence causes consumers to pull back on their spending, and a recession ensues. Recession is ultimately a loss of faith – consumers lose faith they will have a job and thus stop spending, and businesses lose faith they will be able to sell what they make and begin laying off workers. Historically, when consumer confidence falls by more than 20 points in a 3-month period, consumers have lost faith, they curtail their spending, and a recession starts within 6 months. Confidence has slid since late last year, but not to the point that it says recession. Not yet.   #recession #consumerconfidence

The S&P 500 crossed above the 76.4% retracement of its peak-to-trough decline in mid-July. After all declines of 20% or more (bear markets) since 1929, the retracement proved the start of a new uptrend. Historical returns after the 76% threshold crossing are below. On avg, the S&P 500 posted stronger returns in subsequent months. For example, the index rose an average 4.4% in the 90 days after the threshold was breached, and was up in 13 of 16 cases since 1935. This is well above the 90-day return average of 1.9% since 1935. There were only two instances in history in which stocks fell materially in the 12 months after the retracement bogey was reached - this was after the severe 1937 and 1974 drops. Nonetheless, in all cases, stocks didn't retest prior bear-market lows. Bloomberg Intelligence

For me, the big question is whether the drawdown in the jobs market can stop here, or whether the jobless rate keeps rising until we are in a recession. As the excess labor demand chart shows below, once a cycle begins, the pendulum rarely stops swinging until it reaches the other side of the cyclical spectrum. Everything that we think we know about cycles has been upended by the pandemic and the policy response that it unleashed, so it is entirely possible that this time will be different for the labor market, as it (so far) has been for the yield curve and everything else. Of note is the starting point for this cycle. Using the JOLTS data (orange line), this cycle started with an excess labor demand that we have rarely seen. The subsequent drawdown (3.5%) has been large enough that had the starting point been lower, we would likely be in a recession already. So, if we use that series instead of measuring employment vs the natural rate of employment (formerly known as NAIRU), one could argue that we have already seen a full cycle. Lining up all the labor drawdown cycles since the 1940’s, we get the first peaks in unemployment chart below. Not all cycles end up in a recessionary malaise, and the 1950’s and 1960’s stick out here as possible analogs. As for the stock market, of course there is no obvious playbook. The market often corrects, sometimes by a lot and often times very early in the cycle (or before it even begins). Context matters, especially around whether the drawdown is driven by layoffs, or whether it’s a correction to an overheating economy, driven by Fed tightening. The latter has been the case for this cycle, compounded by an increase of the supply of labor (as people re-enter the labor force), as opposed to mass layoffs. But we won’t know how this story ends until 2025 or beyond. As for Fed policy, when the jobless rate goes up, the Fed usually eases. But the length and magnitude vary. As with all these analogs, the 2001 and 2008 mega-bearish cycles really stand out.

📉 The Market Moves in Waves—Are You Prepared? Every real estate investor knows markets are cyclical. But most only think in short-term cycles—rising interest rates, cap rate movements, and supply-demand shifts. What if I told you there’s a bigger cycle at play? The Fifth Kondratieff Wave, a long-term 50–60-year economic cycle, is peaking right now—and history tells us what comes next. 🔹 Every past peak (1929, 1973, 2007) has been followed by a major correction. 🔹 We are aligning with the 18.6-year real estate cycle, which suggests a shift by 2026. 🔹 Smart investors are positioning NOW—locking in long-term debt, preparing for distressed opportunities, and focusing on asset classes that will thrive post-peak. This isn’t about predicting the next interest rate cut—it’s about understanding historical cycles that have repeated for centuries. The question isn’t if a shift is coming. The question is—are you prepared for it? Drop a comment if you’re thinking about how to invest in this phase of the cycle. #RealEstateInvesting #MarketCycles #CRE #InvestmentStrategy #KondratieffWave

Modeling something like time series goes past just throwing features in a model. In the world of time series data, each observation is associated with a specific time point, and part of our goal is to harness the power of temporal dependencies. Enter autoregression and lagging -  concepts that taps into the correlation between current and past observations to make forecasts.  At its core, autoregression involves modeling a time series as a function of its previous values. The current value relies on its historical counterparts. To dive a bit deeper, we use lagged values as features to predict the next data point. For instance, in a simple autoregressive model of order 1 (AR(1)), we predict the current value based on the previous value multiplied by a coefficient. The coefficient determines the impact of the past value on the present one only one time period previous. One popular approach that can be used in conjunction with autoregression is the ARIMA (AutoRegressive Integrated Moving Average) model. ARIMA is a powerful time series forecasting method that incorporates autoregression, differencing, and moving average components. It's particularly effective for data with trends and seasonality. ARIMA can be fine-tuned with parameters like the order of autoregression, differencing, and moving average to achieve accurate predictions. When I was building ARIMAs for econometric time series forecasting, in addition to autoregression where you're lagging the whole model, I was also taught to lag the individual economic variables. If I was building a model for energy consumption of residential homes, the number of housing permits each month would be a relevant variable. Although, if there’s a ton of housing permits given in January, you won’t see the actual effect of that until later when the houses are built and people are actually consuming energy! That variable needed to be lagged by several months. Another innovative strategy to enhance time series forecasting is the use of neural networks, particularly Recurrent Neural Networks (RNNs) or Long Short-Term Memory (LSTM) networks. RNNs and LSTMs are designed to handle sequential data like time series. They can learn complex patterns and long-term dependencies within the data, making them powerful tools for autoregressive forecasting. Neural networks are fed with past time steps as inputs to predict future values effectively. In addition to autoregression in neural networks, I also used lagging there too! When I built an hourly model to forecast electric energy consumption, I actually built 24 individual models, one for each hour, and each hour lagged on the previous one. The energy consumption and weather of the previous hour was very important in predicting what would happen in the next forecasting period. (this model was actually used for determining where they should shift electricity during peak load times). Happy forecasting!

US consumers got a USD 600 billion tailwind from locked-in #mortgages. We estimate the gap between existing and market rates for US mortgages has provided consumers with an extra USD 600 billion since early 2022 (up to 2% of disposable income). This has undermined the monetary #policy transmission mechanism and helps explain why US consumer spending has remained resilient to monetary tightening. The flip side of this means that locked-in mortgage rates may similarly limit the effectiveness of monetary policy easing, adding to the list of downside risks to growth and also to maintain #affordability pressures. For example, year-on-year house price growth has moderated to below 6%, but prices remain 60% above 2020 levels.   During the recent Federal Reserve monetary policy tightening cycle, market rates for US mortgages exceeded the average rate borrowers paid on existing mortgages by as much as 3.2 percentage points. Such a gap has significant economic implications: it lowers monetary policy effectiveness by supporting consumer resilience during hiking cycles and reduces the stimulus effect when rates ease. The structure of the US mortgage market causes this effect. Over 95% of US home loans are 15- or 30-year fixed-rate mortgages. By the end of 2Q24, the market rate for mortgages was roughly 7%, compared to an average existing mortgage interest rate of about 4%. We reviewed this gap for the two years through 2Q24 and estimate that homeowners with fixed-rate mortgages amassed over USD 600 billion in "savings" from their mortgages in the post pandemic expansion, amounting to nearly 2% of personal consumption spending. This helps explain why recent policy tightening did not, initially, appear to slow the economy.   We expect limited stimulus for consumer spending from the monetary policy easing cycle, expected to start in September, due to this low interest rate sensitivity of private consumption. With spending tailwinds fading though and equity markets priced to perfection, the downside risks to growth have risen, threatening a sharper easing cycle over the next year than our baseline currently assumes. https://lnkd.in/eTXtwBjC James Finucane, Mahir Rasheed, Jessica Oliveira Lee  

I’ve had to lead companies through three macroeconomic downturns: the financial crisis, COVID, and the end of ZIRP. Here is my advice to founders/CEOs about what they should be doing right now to prepare and respond in case the stock market/economic turmoil gets worse, which it seems like it will. The mistake I’ve made in the past, and I’ve seen many others make is that we say, “Let’s wait and see, it can’t be that bad, right?” and we keep saying that until we’re face to face with some very hard facts and lose-lose decisions. So this advice is in the vein of: how do we hope for the best but plan for the worst (this is a summary of a longer email with more details I sent to a bunch of the founders over the weekend, if you want the full version just comment “send it” or message me and I’ll get it to you). This is wartime. It is exhausting, I know. But no one is coming to save you. Every investor, every advisor, every customer is/will be dealing with their own fire. The hard reality is that this moment is on you. Get yourself in the headspace to lead through it. It will hit every part of your business. New sales will slow first. Sales cycles will slow down or stop all together. But do not let silence fool you. Churn is coming too, it just lags. Each function needs to prepare for impact now. Make the plans now. Build three: (1) Cut to profitability. (2) Extend runway by at least 12 months. (3) Trim fat without damaging the core. You may never use the plans. But if you do, you will be glad they are ready. And if you need to cut, go deeper than you think you need to and do it once. Multiple rounds break teams. I have made that mistake. Support your customers. They are feeling the same pressure you are. Help them make the case to their CFO. Offer flexible terms. Cover implementation. Do whatever you can to help them buy/keep you. Lean into ROI. If your product saves money, now is your time. Show it. Prove it. Make it undeniable. Renegotiate everything. Every contract, every vendor. Assume it is all on the table. Do not wait. Do not be shy. Communicate with your team (more than you usually do). Your team is watching. Silence breeds fear. Transparency builds trust. You do not need to pretend to have all the answers. But you do need to be honest. And do not make promises you cannot keep. Talk to your investors. Tell them your plans. Ask what they are seeing. Let them know where you may need help. The earlier you know what support is realistic, the better. Secure cash now. If you can draw down venture debt or raise a bit of money, do it. Even if you do not need it yet. And remember, it will pass. The only question is when. Your goal is to make sure your company is around when it does. Sometimes the reward is survival. Sometimes it is efficiency. Sometimes it is winning big while everyone else is distracted.

I was recently asked a question about the signposts that would indicate the US #economy is weakening and is likely to enter a #recession. My response was that, first and foremost, I look for a visibly deteriorating #labor market (less hiring, more layoffs, higher #unemploymentrate, etc.), which would then cause the US consumer to pull back on spending in a meaningful way. Since consumers account for two-thirds of GDP, any notable slowdown in consumption activity would quickly reverberate throughout the entire economy. Alex's Analysis: This morning's jobs report from the Bureau of Labor Statistics, which showed that the US economy added 353,000 jobs and the unemployment rate held steady at 3.7% in January, is a data point which indicates that's not happening right now. However, the news around the labor market has been contradictory lately to say the least. We've seen layoff announcements increase, especially at larger publicly traded companies (see rising unemployment claims and a worse-than-expected ADP report), and circumstantial evidence suggests hiring plans for 2024 have been tempered or outright frozen at many businesses. Furthermore, at the macro level, I feel we're setting ourselves up for disappointment based on the baked-in soft landing expectations that are pervasive right now. As such, other signposts that I'm paying attention to include how the FED handles #interestrate policy (keep in mind that higher interest rates usually take about 2 years to fully reverberate through the economy), commercial real estate market woes which should become more evident in 2Q24, and geopolitical developments (broader war in the middle east anyone?) that have the potential to derail any soft-landing scenario. My best advice to you at this time would be to stay vigilant, pay close attention to key data as it comes in, have contingency plans in place for various scenarios, and be ready to act when the time calls for it.

“Rebalancing” and Re-shoring—More Post-2020 Policy Duds Today, let's examine China’s “rebalancing” and the US re-shoring. The chart below depicts (for the US (yellow) and China (blue)) real retail sales (proxy for consumption) and real industrial production (manufacturing). Their pre-2020 trends are dashed; data are indexed to 100 as of end-2019. The story is not the one usually told: ►China, not the US, is the global consumption driver. Still, consumption falls way short of the pre-2020 growth trend. This is not surprising, given the 25 percent household wealth wiped out by crashing property; since end-2022, growth has returned (the kinked blue arrow). Meanwhile, IP is scaling ever-new heights. ►The lavish household transfers in the US in early 2021 skyrocketed consumption to historic above-trend levels, but, while still above trend, it has treaded water since. At the same time, the re-shoring has had depressing results. Not only is IP barely above end-2019 levels, but it increasingly lags behind even its pre-2020 trend. Policies are to blame. First, China’s relatively better performance doesn’t mean that all is well. Much the opposite. ►Real growth reflects pervasive deflation, and the debt-deflation trap keeps metastasizing. ►Much of consumption stems from one-off stimuli that only bring forward demand, thus lowering future sales and deepening deflation. ►New, unprofitable, large excess capacity sectors were created, again adding deflationary pressures. ►While China’s cyclical position is better than reported, it is, thus, ever farther away from rebalancing—Beijing keeps kicking the can down the road. Second, the US economy is cyclically weak, and economic policy is falling short. ►Households are tapped out, just as the Fed falls behind the curve, and fiscal policy is tightening (based on “current policies”). ►Subsidies and tariffs are flopping as manufacturing lags even historical trends, not to mention lofty goals. The near financial crisis post-“liberation day” and the failure of heavily subsidized Sunnova are only the most recent examples. ►US policy boosted China’s recovery. Post-2020 fiscal largesse created new import demand and helped China counter its property bust. Critical supply chains remain dependent on China (e.g., rare earths), and new tariffs are harming US manufacturing via uncertainty, retaliation, and higher cost of intermediate inputs. These policy failures are spilling over globally. China’s new excess capacity (e.g., EVs) is redirected to exports, and new large trade surpluses with many countries (e.g., EU, Brazil, Indonesia), triggering protectionist backlash. Meanwhile, erratic tariff policy and ongoing large deficits have contributed to stronger currencies for many economies that can’t easily absorb them. Better policies (fiscal consolidation in the US, and broad private-sector oriented structural reform in China) are well-known remedies, but are unlikely unless much greater stress emerges. 

A Bloomberg poll of economists placed a 70% chance of a US recession in 2023. But yet that recession didn’t come. Even without it, I’ve been asked: how can businesses prepare for one? Here are 5 ways you can prepare for hard times: • Manage your cash Not having enough cash means you’re forced to make rash decisions. Grow your cash reserves Build a cash flow forecast Revisit your customer & vendor terms Clean up your receivables collection process • Improve operational efficiency A 2010 Harvard Business Review study showed that Progressive-Focus companies did best in a recession. They defined these as combining offensive and defensive moves. Improving operational efficiency has a long tail. Whether the recession happens or not, the improved efficiency will reduce long-term cost and lead to an overall healthier company. Look at: Supply chain Internal processes Ways to automate • Invest Reactiveness and defensiveness is a sure way to struggle in a recession. Start investing before a recession (while also preserving cash): A few ways to invest: Train up your employees Consider tech that improves margins Look for new markets with vulnerabilities Go vertical in current markets • BUT limit new debt Yes preserve cash. Yes invest in the future. But also yes, limit debt. It may not seem like you can do it all, so this will require some discretion. But a 2017 study found that businesses who started a recession with higher debt-to-asset ratios were more likely to fail during the recession. Limit new debt and consider paying off current debt early. This will allow survival with lower cost load if your business struggles.