Where will this economic road lead us?
When considering the economic business cycle, one way to think about it is like the four seasons of the weather. The cycle starts with a spring-like recovery from the prior cycle’s recession. The frost and cold of the prior winter’s recession have faded, and the air is now filled with the fresh scent of newness. The ground is wet with dew, and it is time to plant and sow the seeds of good fortune. The spring of recovery gives way to the heat of the summer, with the expansion and optimism of the renewal finally taking hold, and people and decision makers interpret the improving climate as the opportunity to invest and seek higher returns – the chance to increase sales and profits.
The heat of the summer expansion eventually gives way to over-expansion and overconfidence in the economy, which leads to bad decision making. As this unrealistic expectation in continued and possibly exponential expansion continues, it reaches a breaking point, which causes the next crisis phase. The crisis of autumn leads to the winter of recession, and everything slows down, almost to a halt. The recession causes the flow of capital, goods, and services to freeze up. This starts a chain reaction as businesses respond to the new economic reality.
We’re traveling on an economic path that has been put in place since the end of The Great Recession, in 2009. The past nine years have been an experience not unlike the turn of the seasons described above. The recent announcement by the Bureau of Economic Analysis (BEA), that stated 2018’s second quarter GDP increase of 4.1%, should be taken as a warning, not a celebration. It reflects an over-expansion and expectation reflecting the late fall phase of the economy, just before everything reaches a breaking point. It seems to me that we are on the verge of entering a new economic season, and winter is just around the next turn in the road.