Lakshman Achuthan and Anirvan Banerji are co-founders of the Economic Cycle Research Institute (ECRI). The opinions expressed in this commentary are their own.
Presidents typically get too much credit — or blame — for the US economy’s current performance, while the unseen drivers of the economic cycle get way too little.
The economy is like a supertanker — it generally takes time for it to change direction. But sure as the sun will rise tomorrow, policymakers will take credit for a cyclical shift that was a year or more in the making. Of course, presidents, Congress and the Fed can nudge the economy in a particular direction, but the results typically take shape with long lags.Biden will benefit from the robust revival that began under Trump’s watch. And we can’t just attribute the revival to Operation Warp Speed, though the extraordinary ramp-up in vaccinations wouldn’t be possible without Covid vaccines being developed and approved in record time. It’s the economic cycle that deserves the lion’s share of the credit for the strong recovery from the Covid recession. The pandemic-related shutdowns suddenly plunged the economy into a deep recession over a year ago, but as the economy began opening up, economic activity automatically rebounded, starting a new cyclical upturn. Real GDP growth bottomed out in the second quarter of 2020 and has been reviving ever since. Record GDP growth followed in the third quarter of 2020 off the bottom of the recession, which was followed by some flattening in the fourth quarter as the second wave of infections took its toll. Naturally, a rebound in growth in the first quarter of 2021 is to be expected as vaccinations ramp up and stimulus checks boost spending, allowing the economy to open up more quickly. Read MoreMore Markets & Economy Perspectives
As important as vaccinations and stimulus checks are to people’s lives, the cyclical upturn in GDP growth that began last spring would have continued regardless. We know this because the forward-looking Weekly Leading Index (WLI), which forecasts the economy’s direction over the coming few months based on its cyclical drivers, anticipated that upturn in GDP growth a year ago. This is why last June we wrote that — despite the deepest recession in living memory — the stock market’s “upturn makes perfect sense if you understand the historical relationship between stock price cycles and business cycles.” This upswing in growth started well before the 2020 election and is now benefiting Biden. Similarly, Trump’s presidency benefited from a cyclical upswing in economic growth that began under President Obama, well before Trump was elected. Again, the evidence comes from actual GDP growth, which turned up in the second quarter of 2016. Because stronger economic growth prospects in 2016 were international in scope, we knew before the 2016 presidential election that the global growth outlook had already begun to improve. And yes, we fully expected that the cyclical improvements were going to be claimed as successes by policymakers for, as the saying goes, “victory has a thousand fathers but defeat is an orphan.”
Then, in early 2017, the cyclical upturns in our forward-looking international indexes flagged the brightest global growth outlook since 2010. In essence, while expectations of more business-friendly policies buoyed US business expectations and stock prices after the 2016 election, this was much bigger than Trump. All presidents benefit from the actions of their predecessors. But they are truly at the mercy of the economic cycle. And Weekly Leading Index growth, having turned up during the last year of Trump’s presidency, continues to climb apace. If it turns down, however, it would be a clear omen of an upcoming cyclical slowdown.The US growth outlook still looks sunny. But as international interest rates rise, there are already some storm clouds on the far horizon. And if they move much closer, we won’t escape a downpour. Today there’s still time to make hay while the sun is shining during the “Biden boom.” But it’s worth keeping an eye on the Weekly Leading Index. If those storm clouds start approaching, it will provide us with fair warning.