It’s easy to get overwhelmed when you think about the economy…
After all, it seems like “official” statistics come out every other day. And of course, analysts and pundits love dissecting these numbers to try to figure out what will happen next.
But at its core, the economy works in a four-phase cycle. And it’s pretty straightforward…
During the expansion phase, many businesses start to take off. In turn, they invest in further expansion and hire more employees. They keep growing.
This collective expansion trickles down into the rest of the economy. Ultimately, it translates into more money for folks to spend as consumers.
The economy keeps getting hotter and hotter until it hits the peak phase. And that’s exactly what it sounds like…
It’s when the most people are employed and consumers are spending at record levels. Things just seem so fantastic that they could go on forever.
But they don’t.
Next up is the contraction phase. The causes of the contraction can vary. But this is when things start to get tougher for many individuals and businesses…
Folks start tightening their belts and spending less. They do whatever they can to survive the tough times. And companies do the same. They make and sell fewer items to consumers.
That leads into the trough phase. This phase comes just before the economy’s recovery. It’s when things feel like they can’t get any worse and the cycle starts to repeat.
It’s pretty clear which phase of the cycle we’re in right now…
In short, business is contracting. And as I’ll detail today, this is more than just an “it feels bad” moment. Key decision-makers are telling us firsthand that the pain is real…
To see what I mean, we’ll dive into the Manufacturing Purchasing Managers’ Index (“PMI”)…
The PMI is a monthly survey from the nonprofit Institute for Supply Management. It asks business owners how things are going. And it’s based on 10 different business activities – things like new orders, employment, prices, and imports.
The survey respondents check off whether each category was better, the same, or worse compared with the previous month. In the end, the business owners’ answers are pooled together to produce the headline PMI.
If the number is above 50, it means things were better over that span. But if it falls below 50, it means more owners said business was worse.
The Manufacturing PMI data for December came out last Wednesday. And it wasn’t good…
In short, the PMI came in at 48.4.
Now, you might say, “Well, that’s pretty close to 50. So things don’t seem that bad.”
The problem is that this is the second straight month with a Manufacturing PMI reading less than 50. And even worse, the numbers have been trending downward since last February. Take a look…
Based on this data, it’s pretty clear that we’re smack dab in the middle of the contraction phase right now…
It’s just before the bottom (the trough phase). We’re heading for a recession, but the darkest days haven’t arrived. We’re not ready for the recovery point of the cycle yet.
As my colleague Marc Gerstein said last Thursday, unemployment remains low. But at some point, the trough phase will get here. And as that happens, things could get ugly…
Unemployment will rise. Consumer demand will crater. And market confidence will plunge.
The bad news is that the trough phase involves a recession. The good news is that recessions last an average of 10 months. So it won’t likely be a long, drawn-out process.
One day, things will start to recover. And we’ll head back into the expansion phase.
But we’re not there yet. For now, we need to stay cautious…
The latest data makes it clear that the contraction phase is upon us. And it means we’re facing more tough times in the weeks and months ahead.
Good investing,
Karina Kovalcik
