Current Economic Conditions Explained 5 (Conclusion)

In this last of a five part series, we end our review of interpreting twenty-one current economic indicators with the conclusions that may be drawn from their impartial analysis. Unlike news agencies and business channels that tend to sensationalize, spin or opine without supporting data, I have no vested interest in what those conclusions may be, other than appropriate for where these data lead.

We separated information into four parts:

• Part One http://www.socyberty.com/Economics/Current-Economic-Conditions-Explained-1-A-Five-Part-Series.376083 reviewed data relevant to Economic Cycle Momentum;

• Part Two http://www.bizcovering.com/Investing/Economic-Cycle-Explained-Part-II-Monetary-Indicators.385567 covered Monetary Indicators;

• Part Three http://www.bizcovering.com/Investing/Current-Economic-Conditions-Explained-3-Sentiment.423213 discussed the all important Sentiment indicator; and

• Part Four http://www.bizcovering.com/Investing/Current-Economic-Conditions-Explained-Part-Iv–Valuation.432971 analyzed Valuation models for the current market.

Economic Cycle Momentum

This is the point at which the US economy is in its economic cycle. Economic cycles occur about once every seven years, and are characterized by

1. Growth, Optimism and Low Interest Rates

Growth in employment, increases in the production of domestic goods and services and generally an upturn in the stock and housing markets, with increased positive sentiment

2. Slowing Growth, Higher Interest Rates and Rising Unemployment

As “full employment” is achieved, and growth in business production begins to exceed what businesses and people can consume, the Fed increases short term interest rates to “cool” growth to sustainable levels. Businesses cut back production. This usually includes layoffs, increasing unemployment and a plateau in the stock and housing markets, with accompanying more negative sentiment.

3. Economic Contraction, High Levels of Pessimism, Lower Interest Rates

As employment rates fall, carrying with them sales and tax revenues, domestic production reaches a “trough.” Sentiment is very negative. Businesses cut costs. At this point the economy has contracted to the degree necessary to absorb excesses produced in its growth period. Generally, the Fed will lower interest rates, making money cheaper, investment potential more lucrative, and growth begins to resume.

Nearly all of the eleven indicators we evaluated were lower in 2007, correctly predicting an economic slowdown in 2008. Recently, economists have opined that this recession did indeed begin in early 2008. In its thirteenth month, it is likely to be the lengthiest slowdown since 1932. With respect to the three cycles described above, this cycle is best described as in its “trough.”