Current Status of U.S. Business Cycle

The last blog looked at the features of a business cycle. Typically, we think of the U.S. economy business cycle. Let's look at the current environment for commodity prices and interest rates relative to the business cycle of the U.S. economy.

In an expansion, commodity prices are rising because of higher demand and interest rates are rising to contain inflation. In a contraction, commodity prices are falling because of reduced demand and interest rates are falling to stimulate the economy. It would be easy to tell which stage we are in if all of the indicators were going in the same direction. However, this typically does not occur.

Let's look at the cost of gold, the fed funds rate, the 10 year treasury bond rate, and the value of the dollar relative to other currencies and see what they tell us about the current status of the U.S. economy business cycle. Gold has gone from about $1,000 to $900 per ounce. Fed Funds rate has been reducing and the experts predict another 0.25% reduction. The 10 year treasure bond rate has been rising recently from a low of about 3.28% to recently 3.82% while the Fed has been reducing the Fed Funds rate. The dollar is close to an all-time high relative to some other currencies

If you listen to the news, the message is that the U.S. economy is either in or going into a recession. Remember that a recession is 6 months with negative growth in the Gross Domestic Product, GDP. Since the economy is the #1 political topic in the current election. The democratic view is that we are in a recession. The republican view that we are in a slowdown.

Based upon the data, who is right the democratic party or the republican party? The data is telling me that the republican view of a slowdown is correct. Why? I do not believe that we will have 6 months of negative GDP. What is the logic?

• The reduction of the Fed Funds rate indicates a contraction.
• The increase in the 10 year Treasury bond rate indicates that we have gone through a trough and have started an expansion. The bond rate has been increasing while the Fed has been reducing the Fed Funds rate which seems rather unusual on the surface. The Treasury bond rate is a better leading indicator than the Fed Funds rate.
• The decrease in the price of gold suggests that the economy has peaked and is entering a period of contraction. This is a bad indicator for our economy and is a better indicator for the global economy.
• The value of the dollar makes it more attractive for products made in our economy to be sold globally. It helps increase exports and reduce imports. This helps our economy expand in the future.

The Fed Funds rate is telling us that our economy is in a trough. The 10 year Treasury bond rate is telling us that our economy is past the trough and will be expanding. The value of the dollar helps our economy.

Bottom Line: Do not listen to the doom and gloom. The indicators suggests that our economy is at a trough in our business cycle starting to enter an expansion in the future. Do not be afraid of purchasing mutual funds that invest in stocks if it fits your risk tolerance.