Market-oriented economies such as the U.S. are inherently cyclical, and there are warnings of a cyclical slowdown in 2018. Yet this view is at odds with the increasingly optimistic consensus that economic momentum, turbocharged by President Donald Trump’s tax cuts, will sustain the upswing throughout the year.
The notion that momentum propels economic expansion — and is therefore a good way to forecast growth — is often valid away from cycle turning points. This is why extrapolating recent trends is a popular basis for forecasting growth. The exception, by definition, is at cyclical turning points, when momentum reverses. This is when gross domestic product consensus forecasts systematically exhibit their largest errors. (See “How Reliable Are GDP Consensus Forecasts?“)
Good leading indexes are designed to signal when the risk of a turning point is high, or when some of the biggest GDP forecast errors are likely. Lately, growth in the Economic Cycle Research Institute’s U.S. Short Leading Index, which we recently highlighted, has been “pointing to a U.S. growth rate cycle downturn.” (See “Bond Markets Really Are Signalling a Slowdown.“)