Beating the Business Cycle by Banerji Anirvan. Achuthan Lakshman

Author:Banerji, Anirvan.,Achuthan, Lakshman.
Language: eng
Format: epub
Tags: Fiction
ISBN: 9780385512589
Publisher: Random House Inc.
Published: 2004-05-18T04:00:00+00:00

7

Measuring Business Cycles: The State of the Art

Of course, there is more to any economy than a single overarching business cycle. In fact, it is simplistic to think that any one leading index can capture all of the ebbs and flows in an economy. Geoffrey Moore's observations revealed that, beneath the overall business cycle, there were a number of loosely related but distinct cycles at work.

As it turns out, it is absolutely essential to be able to predict the direction of these “many cycles,” not so much as a way to predict turns in the overall business cycle but to avoid being misled by seemingly contradictory evidence. For example, in Chapter 4 we discussed how the late-1990s bubble economy was encouraged by a misunderstanding of the link between economic growth and inflation, which fueled misguided exuberance about a “new paradigm” of endless noninflationary growth. But if you were watching the Future Inflation Gauge, or FIG, it was clear that this was just a temporary delinking of cycles in inflation and growth. To the surprise of many, but in line with the FIG, the Federal Reserve raised interest rates aggressively in 1999–2000, triggering a bear market in bonds and ultimately popping the bubble. This gives you a taste of how powerful the many-cycles view can be.

The 2001 recession brought with it correct predictions of a downturn in inflation, but even louder calls that the housing “bubble” would soon burst. Once again, confounding the experts, home prices didn't follow the course of overall inflation. In fact, as our Leading Home Price Index predicted, home prices kept rising through the recession and recovery.

Or think of the “jobless recoveries” that followed the business cycle upturns in 1991 and 2001. Understanding that the cycles in employment are different from the business cycle, and using our Leading Employment Index to separately assess job prospects, provided clues to the gloomy employment outlook despite a clear upturn in GDP growth. Thus, following these many cycles can help you foresee when the behavior of the economy will depart from the norm propounded by the pundits. For investors, the best opportunities are often created by such divergences, which blindside even sophisticated financial professionals.

For businesses, the nuances revealed by the many-cycles view are also critical. For example, in a two-speed economy, an accurate forecast of a U.S. business cycle upswing may be accompanied by weakness in global manufacturing, as was the case following the 1997 Asian Crisis. Without the Leading Manufacturing Index to highlight the gloom in the industrial sector, a manufacturing firm could well be misled by correctly optimistic predictions about the overall business cycle. Analogous situations could arise for companies in construction or services, where growth may be temporarily out of sync with the overall economy.

For investment professionals, of course, early warning of such divergences between sectors can be invaluable for guiding asset allocation. For businesses and individuals alike, the many-cycles view reduces the apparent discord in the deluge of data, clarifying the complexities of the economy and providing clear clues to the correct course of action.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.