Based on history, downturns typically happen within roughly 8 to 16 months from a peak in America’s Gross Domestic Product (GDP) performance on a Purchasing Power Parity (PPP) basis. The United States posted a respectable 4.2% improvement in its GDP performance in 2019 compared to one year earlier.
GDP tracks a long-term growth trend via business cycles of growth or recession that repeat approximately every 5 years or so, albeit that no two business cycles mirror the same duration or size. America’s National Bureau of Economic Research found that there were 33 business cycles from 1854 to 2009.
The average length of an expansion is 38.7 months compared to 17.5 months during a recession. Historically, the longest economic contraction in the United States was the 1929 Great Depression that lasted 43 months. That’s more than double the 18-month duration for the Great Recession which began in 2007 and was caused by the real estate bubble created during the 1991 to 2001 boom states Cameron King in his analysis for Forbes.
Cyclical indicators are erratic with multiple major influences. Worse, there is no consensus for which indicators universally signal business cycles in all cases.
Nevertheless, The Economist organizes its benchmarks into 3 critical categories: leading indicators that turn in advance of a cycle change; coincident indicators that define when the overall business cycle turns; and lagging indicators that top out following a business cycle.
America’s Leading Business Cycle Indicators
For the United States, 3 of the selected 6 leading indicators flashed red based on the latest annual reporting period. That the Federal Reserve cut its prime rate by three-quarters of a percentage point from 2018 to 2019 shows how vulnerable the US economy is to higher interest rates. America’s business confidence scores and passenger car sales declined from 2018 to 2019.
Three other leading indicators, in contrast, showed flickers of improvement. US building permits posted the strongest percentage increase since 2018. Other gains were driven by better consumer confidence scores and retail sales. The latter went from a -0.51% decrease in 2018 to a 3.51% expansion in 2019.
The Economist estimates that an economy hits its highest level about 18 months after interest rates begin to rise compared to 8 to 16 months for waning business and consumer confidence. There are shorter timeframes in advance of an economy’s GDP peak for slowdowns in car sales (6 months), retail sales and building permits (2 to 3 months).
- Interest rates: 1.625% at Dec. 2019 (down -0.75% from 2.375% one year earlier)
- Business confidence: 98.76831 points at Dec. 2019 (down -1.9% from 100.6392)
- Building permits: 1,461,000 at Dec. 2019 (up 6.8% from 1,319,854)
- Consumer confidence: 101.404 at Dec. 2019 (up 0.33% from 101.0667)
- Retail sales: Up 3.51% at Dec. 2019 (reversing from down -0.51%)
- New car sales: 450,250 vehicles at Dec. 2019 (down -8.72%)
Note that the Federal Reserve slashed the US interest rate to a record low 0.25% in December 2008 as the Great Recession deepened. From 1971 to 2019 that overall Fed Funds rate averaged 5.64%.
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity. In contrast, consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Building permits mean official authorizations required before new building construction can proceed. The US Conference Board has studied building permits as a leading macroeconomic indicator for country and global business cycles. Typically, construction work starts immediately after a building permit is granted.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
The car sales metric specifies the number of new passenger cars sold irrespective of price.
America’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that the United States economy is healthy given the positive annual growth.
- GDP: US$21.439 trillion at Oct. 2019 (up 4.2% from $20.58 trillion)
- GDP per capita: $65,112 at Oct. 2019 (up 3.6% from $62,869)
Please note that the United States’ share of the world’s overall GDP of $141.860 trillion was 15.1% at October 2019, down from 15.2% one year earlier.
In addition, America’s GDP per capita income of $65,112 is about 3.5 times greater than the global average GDP per person of $18,391 as of October 2019.
America’s Lagging Business Cycle Indicators
All 3 of the selected lagging indicators improved compared to the same metric in the prior year.
Usually capital investment shadows GDP peaks and valleys via a 12-month delay. Both inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 21.103% in 2019 (up 0.134% from 20.969%)
- Unemployment rate: 3.725% in 2019 (down -0.167% from 3.892%)
- Inflation rate: 1.818% in 2019 (down -0.617% from 2.435%)
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator that records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Unemployment rate is a crucial percentage based on a country’s total labor force (not its full population) since it profoundly impacts how many debtors can afford to pay their mortgages and other borrowings.
Inflation rate documents the percentage change in average consumer prices in a country over a one-year period.
Research Reference Materials:
Forbes, Recession Is Overdue By 4.5 Years, Here’s How To Prepare. Accessed on February 3, 2020
MarkLines Automotive Industry Portal, USA Flash report, sales volume, 2019. Accessed on February 3, 2020
National Bureau of Economic Research, US Business Cycle Expansions and Contractions. Accessed on February 3, 2020
The Conference Board, Global Consumer Confidence Unchanged in Q3. Accessed on February 3, 2020
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on February 3, 2020
Trading Economics, United States Fed Funds Rate. Accessed on February 3, 2020
Wikipedia, Consumer confidence index. Accessed on February 3, 2020