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Cyclical Components of GDP, the Most Important Chart in Macro

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20 comments on Cyclical Components of GDP, the Most Important Chart in Macro

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Cyclical components of GDO, image from Tweet below

Video Explanation of Cyclicals Importance

https://www.youtube.com/watch?v=7akLC9lkQ2I

Cyclicals including housing and durable goods only constitute ten to fifteen percent of GDP, but the swings account for variations between growth and recession according to Eric Basmajian at EPB Macro.

Housing Bust Underway

Basmajian’s theme ties in with the housing bust now underway.

For discussion please see Expect Huge Negative Revisions to New Home Sales as Sales Crash and Orders Cancelled

Also note Existing Home Sales Skid Another 3.4 Percent in May, Down Fourth Month

This post originated at MishTalk.Com.

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20 Comments
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Captain Ahab
Captain Ahab
4 years ago
Thanks to MIsh to linking to this. There is much to learn from the video and cyclicals chart, plus it is clear and concise–in your face Econ 101. Housing and durables are well known leading indicators of the overall economy. Missing is the ‘export’ effect–what the US produces and exports brings in ‘wealth’ from beyond its borders (economic base theory), and amplifies its population and productivity–generators of GNP. The ‘import’ effect has the opposite effect. Both connect the US to the global economy, which might not be a good thing.
Now, it is possible that the US becomes more of an innovator/exporter, particularly of high-value-added goods/services, yet IMHO, rather unlikely. Administrations would need to target innovation and encourage exports–the reverse seems to be the case currently.
A late addition, the cyclicals as % of GNP have been trending down long term….
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worleyeoe
worleyeoe
4 years ago
Ethan Harris, BoA Analyst:
“What seems to be forgotten here is that inflation is a sticky, slow moving variable. Spikes can reverse quickly, but underlying inflation tends to move in a gradual lagged fashion with respect to the economy. It is going to take time to cool off the labor market and even more time to lower labor cost-driven inflation. The market is not a good gauge of inflation expectations for ‘real people’ and investors have an oversimplified view of the link between growth and inflation. In our view, it is going to be extremely hard for the Fed to get inflation back to target in a two-year time span.”
Finally, someone with some sense. Probably 80% of the products you can buy in Home Depot either aren’t going back down or will drop by maybe 25% from what their new prices are. Lumber and things that are bought in large quantities will recede a great deal by this winter. My Kroger chicken that shot up 50% in two months this spring might recede 25%, but it ain’t going back to $1.99.
Prices are sticky and many of these have been raised permanently higher, resulting in permanent inflation that this time next year won’t be captured in YOY metrics but will be present all over the place.
My hope is that it gets bad enough that we see deflationary pressures rearing their ugly head. At some point, there’s got to be a financial shock that wakes central banks up as well as those who supposedly govern on our behalf.
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JackWebb
JackWebb
4 years ago
Reply to  worleyeoe
BINGO! Look at how long it took for inflation to get back below 3% after the brush with hyperinflation between 1979 and 1982. If tighter money sends inflation back to where it was in 2019 as fast as the yammerers on the financial channels are saying (not to mention the White House), it’ll be a first.
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blacklisted
blacklisted
4 years ago
Capital will continue to flee from the periphery to the core (US dollar) because of the sovereign debt crisis. Were else is capital supposed to go? Only so much can go into collectibles. Why wouldn’t blue chips stocks, PM’s, and RE benefit from all the coming defaults around the world?
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Steve_R
Steve_R
4 years ago
The only chart that matters to me right now is the bloomberg commodity index $BCOM, moved down to 50 simple moving average on the weekly and small rally, then rolled over again today. This is good news for business and the consumer, (IMHO) it is showing if inflation is backing off or not.
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GruesomeHarvest
GruesomeHarvest
4 years ago
Though interesting, I dont think the cyclical GDP chart is all prescient as the guy in the video does. It seems to confuse cause and effect like keynesians are likely to do. What we do know is
1. Too much debt is the source of economic woes
2. Central banks play with the money supply to influence people’s behavior
3. The central banks have been fiddling with the money supply for way too long
4. The result has been an explosion of unsustainable debt
4. There will be hell to pay because of it.
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Thetenyear
Thetenyear
4 years ago
We understand better how little we understand about recession
Great video! Surging interest rates have crushed autos and are in the process of crushing housing. What stood out to me on Basmajian’s chart is that the debt fueled stimmy peak does not even come close to taking out any of the four prior peaks.
The recession is upon us. Just waiting for Powell’s confirming words: “We understand better how little we understand about recession“
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Matt3
Matt3
4 years ago
The chart doesn’t seem to correlate with reality. The 70’s were not a time of great economic growth. This was the era of stagflation.
The period 2007 – almost the pandemic was awful? I thought 2019 was a good year. I also think there were quite a few good years before that.
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Salmo Trutta
Salmo Trutta
4 years ago
“Under the new regime, the stance of monetary policy depends primarily on where the Board sets the administered rates it pays on bank reserves and reverse repos.”
The Menace of Fiscal Inflation – Alt-M
That deals velocity a double whammy.
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Salmo Trutta
Salmo Trutta
4 years ago
You can’t model an economy without metrics. And the metrics the FED uses are contaminated and keep changing (getting more diluted). The FED desperately needs audited.
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Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  Salmo Trutta
No audits. “It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning” — Henry Ford
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Salmo Trutta
Salmo Trutta
4 years ago

see: June 03, 2022 “Understanding Bank Deposit Growth during the COVID-19 Pandemic”

“the deposits may leave the banking system if the holder of the deposits exchanges them”… “in the Federal Reserve’s Overnight Reverse Repurchase (ON RRP) facility.”

The problem is that the injection of new money had no precedent. It was the largest increase in the money supply ever.

“Following the onset of the COVID-19 pandemic in 2020, the deposits-to-GDP ratio jumped to over 75 percent and has remained near that level during the pandemic period to date.”
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8dots
8dots
4 years ago
DXY weekly. If Fri close is < 107.615, last week high, this week high is a spike to ignore.
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FooFooFed
FooFooFed
4 years ago
Reply to  8dots
dollar going higher.
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Greenmountain
Greenmountain
4 years ago
Housing may be down, but what about apartment construction? It is going wild in my town.
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JackWebb
JackWebb
4 years ago
Reply to  Greenmountain
There are considerable lead times. The real question would be projects now starting.
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FooFooFed
FooFooFed
4 years ago
More alarming is that red line, 2007-2020, is the lowest on the ENTIRE chart! Then stimmy hits and it shoots north for
first time in 13 years. Of course it will revert to the red line! Other than stimmy checks what WOULD make it sustain its current position??
This chart is saying what Ive thought all along since GFC 1….there hasn’t really been a recovery. Worst thing we can do
is put 900 PhD economists in a building all using same models and massively towing the same ideologies. Then giving them
a guaranteed pension afterward.
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KidHorn
KidHorn
4 years ago
Reply to  FooFooFed
More stimulus. Erasing a trillion in student loan debt will effectively inject another trillion of money supply. Over a period of time.
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Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  KidHorn
But what would be the effect of dumping 900 out of work PhD economists on an unsuspecting public?
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Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  Lisa_Hooker
They can learn to code, or do some other form of economically useful activity.
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