What many professionals, including economists at the Fed, fail to realize is how late in the cycle the U.S. economy actually is, he said. It’s understandable, given the unprecedented nature of the pandemic economy.
Traditional timing in normal economic cycles has little relevance. Rosenberg estimated the U.S. economy currently was in the eigth inning, not the sixth or seventh inning. Based on a series of 18 indicators he and others developed at Merrill, the current cycle is 82% over.
The fact that the current economic expansion started in May 2020 is distorting many economists’ perception. Remember that the “last recession lasted two months,” he said.
The Fed “usually tightens policy in the third inning. They’ve never started this late in the cycle except in 1999,” he noted. “What happened a year later?”
Looking at the stock market, Rosenberg pointed to the relative weakness of cyclical stocks, which appears almost precisely the same as it did at the onset of the last three recessions.
Meanwhile, boring utilities and consumer staples stocks are hitting new highs, another end-of-cycle signal.
The composition of inflation has completely reversed over the last year, Rosenberg continued. For example, Russia's invasion of the Ukraine and the latest outbreak of covid in China both short-circuited demand for U.S. exports in the world's two biggest consumer markets, Europe and Asia.
“This [current] inflation is about supply; last year it was about demand,” he said. “So many complex supply issues are out of the Fed’s control.”
Recessions typically follow a food-and-fuel price squeeze when price increases exceed 6%. Currently, they are rising at an 8% rate.
Rosenberg differentiated the present bout of inflation from the 1970s because there is a corresponding “wage-price spiral.” Real inflation-adjusted average weekly earnings have been falling for more than six months.