-Central Bank’s Watch-
-Central Bank’s Watch-
|US CORE PCE YY|
|US CORE CPI YY|
Expansion – Peak – Contraction – Trough
GDP incrasing at rate 2-3%
Unemployment reaches natural state of 4%
Inflation near 2% target
–> Goldilocks economy = well-managed economy can stay in bull market for years.
Expansion phases near its end when economy overheats with GDP > 3%, Inflation >2% (might reach double digits), Investors in state of irrational exuberance.
The month when expansion transitions int contraction phase.
Starts at peak and end at trough.
GDP falls below 2%.
When GDP becomes negative = recession.
At end of contraction phase the unemployment rate increases.
When economy transitions from trough to peak.
Measurement of Business Cycle by NBER:
(1) Quarterly GDP growth rates
(3) Real Personal Income
(4) Industrial Production
(5) Retail Sales
The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy lasting more than a few months. It is visible in real GDP, real income, employment, industrial production and wholesale retail sales.
Most recessions started when there was positive employment growth. NBER defines the start of a recession as an economic peak, that’s why.
Management of the Business Cycle:
The Government uses Fiscal Policy to influence the economy: expansiory fiscal policy is used when they want to end a recession.
The Central Bank uses Monetary policy: it lowers interest rates to end a contraction which is named “expansionary monetary policy”.
The CB raises rates to manage an expansion. We call it a contractory monetary policy.
3 factors to the Business Cylce:
(1) Supply and Demand
(2) Availability of Capital
(3) Consumer Confidence
Duration of Business Cycles:
Longest cycle from trough to peak: 120 months (1991 – 2001)
Shortest cycle from trough to peak: 12 months(1913 – 1914)
Average cycle from trough to peak: 39 months
Average cycle 1945 – 2009: 58 months
Longest cycle from peak to trough: 65 months (1873 – 1879)
Shortest cycle from peak to trough: 6 months (1980 – 1980)
Average cycle from peak to trough: 18 months
Average cycle from 1945 – 2009: 11 months
Current Cycle from trough Jun 2009: 109 months
|Jul18 / Q1||Jun18 / Q2||May18 / Q3||Apr18 / Q4|
|US 10YR YIELD||2.85%||2.87%||2.95%||2.77%|
|SP500 forw. earnings||37||39||37||36|
|SP500 earnings yield||4.37%||4.11%||4.25%||4.29%|
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