The current economic expansion is much nearer its end than its beginning, as accumulating hints suggest—including the stagnating stock market, about which we’ll say more in a bit. Already the concerns are pushing up long-term interest rates, which is bad for asset values. Uncertainty about the effects of a trade war is causing many companies to postpone action, dampening potential investment. Indeed, look past those disco balls and you’ll see economic warning signs everywhere. A significant slowdown or even recession is coming sooner or later, and it’s probably coming sooner than you think. It always does.
A Seasonal Change is Coming
LET’S START WITH THE OBVIOUS: Economies follow cycles. Unlike with seasons or the moon or the ocean tides, the timing of the business cycle is never easy to predict. But at some point, economic activity reaches a temporal peak, then begins to contract until eventually it bottoms out and starts growing once more. A familiar sign that we’re in the waning stage of the growing season, ironically, is that the economy overheats—think of it as an Indian summer: Companies push factories to produce more than their long-term sustainable output, pushing employees to work more overtime. Demand is so strong that inflation starts to increase, leading central bankers to raise interest rates, which causes asset values, including stock prices, to level off or fall. Ray Dalio, CEO of the world’s largest hedge fund, Bridgewater Associates, writes, “That is why it is not unusual to see strong economies accompanied by falling stock and other asset prices.”
All of that is happening now. The Congressional Budget Office finds that this year, the economy has begun overheating in just this way, producing more than its sustainable longterm potential. The CBO predicted in May that as wages rose, more people who had left the labor force would come back to work, and, yes, that’s just what happened in June. The labor market continues to be tight, with workers so confident that they’re voluntarily quitting their jobs at the highest rate in 17 years. Meanwhile, employers will likely have to bid up wages in order to attract and keep good workers, hitting corporate earnings directly.
Inflation and interest rates are rising and will likely continue to do so, forecasts the CBO. With all those factors combining, says Dalio, “We know that we are in the ‘late-cycle’ part” of the business cycle.
