To our surprise, the US economy has not entered a recession over the past two years. This is not because a recession has been avoided altogether, but because the current economic cycle has been elongated.
We use the commodity/ ratio (the Spot Commodity Index (GNX) or the CRB Index (CRB) divided by the US$ gold price) to define booms and busts, with booms being multi-year periods during which the ratio trends upward and busts being multi-year periods during which the ratio trends downward.
The vertical lines drawn on the following GNX/gold chart mark the trend changes (shifts from boom to bust or vice versa) that have occurred since 2000.
It’s not essential that the bust phase of the cycle contains a recession, but it’s rare for a bust to end until a recession has occurred. Usually, the sequence is:
- The commodity/gold ratio begins trending downward, marking the start of the economic bust phase.
- The economic weakness eventually becomes sufficiently pervasive and severe to qualify as a recession.
- Near the end of the recession, the commodity/gold ratio reverses upward, thus signalling the start of a boom.
It is not unusual for the stock market to continue trending upward after the bust begins, but in the past, the stock market has always peaked prior to a recession getting underway.
For example, an economic bust began in October 2018, but the continued to make new highs until early 2020. For another example, during the first half of the 1970s, the stock market continued to trend upward for about three years after the start of a bust.
By the way, due to the change in the structure of the US stock market, it’s possible that the next cyclical peak in the SPX will occur AFTER the start of a recession. This is because, thanks to the domination of passive investing, the stock market no longer forecasts cyclical trends in corporate earnings, interest rates, or economic growth; it simply responds to passive money flows.
In the current cycle, the commodity/gold ratio has been trending downward since the first half of 2022, meaning that the US economy has now been in the bust phase of the cycle for about three years without entering recession. This is unprecedented within the context of the past 30 years, but it is comparable to what happened during the 1970s.
A much longer-term view of the commodity/gold ratio is provided by the monthly chart displayed below. This chart uses the CRB prior to 1993 and the GNX thereafter.
There were two long bust phases during the 1970s, the first starting in Q1-1970 and the second starting in Q3-1976. The time from the start of the first bust to the start of a recession (November 1973) was about 3.5 years, and the time from the start of the second bust to the start of a recession (January 1980) was also about 3.5 years. Late this year will be about 3.5 years from the start of the current bust.
Consequently, although the current economic cycle has been elongated to an unusual extent relative to the cycles of the past few decades, it is currently in line with the cycles of the previous period during which inflation generally was viewed as the major economic issue.
