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Click to enlarge.
An optimal path has been added in blue. I argue that if the business cycle was dead then we'd be sticking to the blue line like glue. It is the optimal path. The labor force and employment would always grow (or shrink) at exactly the same pace.
During the Great Recession we spent a great deal of time below the optimal path. Now we're spending time above it. It is mathematically impossible to stay above it permanently though. It is not possible to grow civilian employment at a greater rate than the civilian labor force over the long-term. Eventually we would run out of labor force.
Unfortunately, the same cannot be said in reverse. It is theoretically possible to grow civilian employment at a slower rate than the civilian labor force over the long-term. We would never run out of labor force. Sigh.
Let's zoom in for a closer look since the start of the Great Recession.
Click to enlarge.
We are late in the business cycle and are attempting to make a very large elliptical sweep in a clockwise direction. It is only a matter of time before we come back down to the blue line again. We must. It is not optional. As seen in the next chart, how we get back to the blue line is open for debate.
Let's zoom in even closer and just look at what's been going on over the past year.
Click to enlarge.
The trend diverged back in October (moving sharply to the left on the chart as labor force growth began to fail). You will note that this happened before the winter weather appeared. We therefore cannot blame the winter weather for it. This actually takes us further away from the blue line but not in a way that shows sustainable strength. In my opinion, it is simply the first crack in the cyclical dam.
Let's sum this up.
Contrary to popular opinion:
1. The business cycle is not dead.
2. The Fed has not permanently put an end to recessions.
3. The best time to invest in risky assets is near the end of recessions (not near the end of expansions).
The best we can hope for is that we gradually come back down to the optimal path in blue (the path seen in the first two charts) and stick to that blue line permanently. Growth would gradually slow as we do it. The business cycle would then be dead and the economy would be much more predictable from there on out. That's actually a fantastic outcome in the grand scheme of things, not that those expecting accelerating growth from here would like to see it.
I doubt very much that's what happens though. I expect us to overshoot the optimal path to the downside again, just like every business cycle before it. Here's the worst part. I believe that it will happen while we're still stuck in ZIRP. That will not be a party. It would shock those who believe that the Fed's ZIRP can prevent recessions, especially those who believe that long-term interest rates are currently low (and must therefore rise).
This is not investment advice.
Source Data:
St. Louis Fed: Custom Chart
