That’s why growth in the U.S. Coincident Index (USCI) has been falling rather steadily since the start of 2015, and is now hovering near a 2-year low. By the way, this is the same measure of economic growth used in the earlier regressions.
These concerted declines in output, employment, income and sales growth, resulting in a USCI growth downturn, constitute the hallmark of a growth rate cycle downturn, meaning a full-blown cyclical slowdown, on top of the long-term structural decline in trend growth.
Understanding this, we warned last summer that the Fed’s rate hike plans were on a collision course with the economic cycle.
So the Fed started its rate hike cycle a year inside a growth rate cycle downturn, something it has never done before. This may be why the Fed is having trouble following through on its rate hike plans, even though its dual mandates have essentially been met.
Under these circumstances, can the Fed hike rates much further?
In fact, will they actually have to backtrack and cut rates the way the European Central Bank (ECB) did in 2011?
Let’s look at the circumstances under which the ECB and the Bank of Japan (BoJ) reversed their last rate hike cycles, in terms of ECRI’s Eurozone and Japanese Long Leading Index growth rates.
The light blue line is the growth rate of ECRI’s Eurozone Long Leading Index, and the vertical black line shows where the ECB started hiking rates in 2011.
The blue down arrow shows where they had to reverse course and cut rates just seven months later, after Eurozone Long Leading Index growth had plunged deep into negative territory.
The red line shows Japanese Long Leading Index growth, beginning in the mid-2000s, and the vertical black line once again shows where the BoJ started hiking rates in 2006.