Business Cycle Clock

Business Cycle Clock


Data on this page was last updated on May 18, 2023

Where are we in the business cycle?

The business cycle is the Gross Domestic Product (GDP) fluctuation above or below the potential aggregate output of an economy that follows a natural contraction and expansion path. It is common knowledge that the events regularly support each other in a usual sequence: upswings, downswings, and eventually new accelerations.

Not all business cycles are the same, and it would be naive to assume that each cycle is followed by the next, but, much more precisely, each is causing the next. Understanding the business cycle’s causality will give a practitioner an advantage to anticipate the next phase beyond what an observer can quantify. The most crucial aspect of reason in the business cycle is an understanding that a business cycle does not operate in a vacuum but is influenced by other cycles.

The process of ebbs and flows in different macroeconomic variables through a business cycle tends to have common characteristics across cycles. Variables of interest for analyzing business cycles include employment, unemployment, household incomes, retail sales, spending on durable goods like automobiles, housing investment, industrial production, business orders, shipments, inventories, commercial construction, profits, revenues, consumer inflation, producer price inflation, wage inflation, productivity, unit labor costs, and GDP inflation, to name some of the main categories. In addition, financial variables like interest rates, credit, and money supply are cyclical. We will discuss the business cycle behavior of economic variables in the next chapter. Here we focus on the business-cycle patterns of fundamental variables and profits, labor costs, and inflation.

Stages of the Business Cycle

Currently, we can identify six stages and constantly pursue additional factors and stages. We know that this area of study is forever expanding and changing. There is currently no formula for understanding the psychology of the human brain; economics is, after all, social science and a dismal one. We will continue to research using data science combined with sound fundamental logic to adapt to changes in the economic landscape.

The six stages that we can identify are:

  • Stage One - Recession
  • Stage Two - Recovery
  • Stage Three - Early Expansion
  • Stage Four - Mid Expansion
  • Stage Five - Late Expansion
  • Stage Six - Imminent Recession

Our current research has been developed through the business cycle and security returns over the last 50 years. It provides overwhelming evidence that stages can be identified on a timely and consistent basis. The results supply us with a solid theory that risk premia in the financial markets reflect the current macroeconomic backdrop of each stage, as such, should be compensated for in a portfolio's allocation, increasing returns while minimizing risks.

Current Stage of the Business Cycle

Our Stage algorithm is based on the business cycle clock and machine learning classification using a decision tree machine learning.

The Business Cycle Clock

Our business cycle clock combines some of the more important indicators that we use to identify different business cycle stages. Alone, these indicators may not indicate the entire cycle, but each one serves its unique function when combined. Using a decision tree and random forest AI, we can estimate our business cycle. This webpage is used to monitor the process.

Real Monthly GDP Rate

The GDP growth rate is often confused with the business cycle, but they are the same and yet different. A recession needs to contract the economy’s growth, and slowing growth is a precursor to a recession. But the growth rate can trend down without reaching negative growth and reverse without causing a recession.

Real Monthly GDP Output Gap

Capacity Utilization: Manufacturing

There is slack in the industrial capacity indicator that varies over the business cycle. The capacity utilization rate for manufacturing tends to bottom at the end of a recession, with maximum slack available for growth. As industrial production (a coincident indicator) picks up, the slack in capacity utilization diminishes and tends to peak before or at the beginning of recessions. Over the long haul, 80 percent has been considered a rough threshold for total capacity in manufacturing. However, a secular decline in the peak has been identified, placing overcapacity more around 77 percent.

Monetary Policy Cycle

Wage Inflation

Labor Gap

Labor Slack

U-6 unemployment rate less U-3

Yield Curve

10-Year less 2-Year Treasury Spread