This is not a normal business cycle, the usual rules don’t apply


Much of economic analysis depends on correlations.

Lately I’ve been hearing a lot of talk about things like new orders to inventory ratios in the ISM manufacturing index and overlaying that with recessions.

There are dozens of other examples of hand-picked correlations overlaid on the long history of economic data.

It’s garbage.

It’s not that correlations aren’t valid in normal times, it’s that we’re not in normal times.

That’s like saying that since initial jobless claims rose by 6 million in March 2020, we were headed for the worst depression in global history. What had really happened was that the economy had come to a standstill due to a pandemic. It was not a normal cyclical slowdown and there is no need to compare it to any. If your model was built around using this claims data – or any data from March 2020 – as a predictor of what was to come, you got the wrong signal.

The impact continues to support many economic indicators.

The workmanship is particularly notable. Factories were shut down, then during the lockdown, consumers bought goods like crazy and factories couldn’t catch up. Thus, manufacturing ran at full speed in an effort to fill orders. Eventually they will fill them and the production to slow down.

Now, if you compare this downturn to a regular economic cycle, it looks like something is wrong on the demand side. But this is not a normal business cycle. Any economist with half a brain should have already figured out that manufacturing will slow down. And anyone with a fully functioning brain should realize that slowing manufacturing is not a sign of a faltering economy, but rather of normalization.

Of course, this is all going to be a botched process. People are uncertain and we don’t know how much stocks will come back to. I would have expected companies to be running larger inventories a year ago and especially with China’s open and closed economy, but all the talk of the recession might put inventory managers back on track just-in-time mindset.

In any case, many signals from the economy are also distorted.

The answers won’t come in the chart overlays, because this is not a normal business cycle. It is an economy that has been rebounded from the outside by pandemic, reopening, government largesse and broken supply chains.

Figuring out where this is heading will take creativity, not references to old playbooks.


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