Time and cycles

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Time-based economic forecasting is unfashionable. Until the mid-twentieth century, economists were sympathetic to the idea that business activity and prices fluctuate in regular cycles. The majority view today is that booms / busts reflect policy errors, market failures or supply-side shocks: cycles still occur but they are unpredictable. The behaviour of the global economy in recent years, however, is explicable in terms of the old fixed-length cycles. The approach suggests that another significant economic downswing will occur in 2016.

According to the old approach, there is no single “business cycle”. Observed growth fluctuations, instead, are the product of separate cycles in different parts of the economy. The three main cycles are: the 3-5 year Kitchin cycle in stockbuilding; the 7-11 year Juglar cycle in business investment; and the 15-25 year Kuznets building cycle. Each cycle is named after the economist who “discovered” it.

Recessions almost always involve significant weakness in business investment. In the US, recessions occurred in 1981-82, 1990-91, 2001 and 2008-09, according to the National Bureau of Economic Research. The spacing, clearly, fits the 7-11 year periodicity of the Juglar cycle.

The severity of recessions, however, depends on the direction of the other cycles. In 2008-09, a Juglar downswing coincided with the weak phase of the Kitchin stocks cycle and the final stages of a downswing in the longer-term Kuznets building cycle. The previous occurrence of simultaneous weakness in the three cycles was in 1974-75. Global industrial output fell by 13% from peak to trough in 2008-09 and by 12% in 1974-75 – much larger declines than in other post-World War Two recessions.

In the early 2000s, by contrast, the recessionary impulse from the Juglar investment cycle was moderated by an upswing in the Kuznets building cycle. The 2001 US recession was unusually mild, while the UK avoided any fall in output. Central bankers attributed this benign result to their policy-making brilliance, a belief that contributed to complacency during the credit bubble and the initial stages of the subsequent bust.

The short-term Kitchin stocks cycle is usually associated with minor growth fluctuations, unless reinforced by the other cycles. Such fluctuations, however, can still have a significant impact on financial markets. The last Kitchin cycle downswing occurred in 2011-12: the global economy hit a soft patch and equities fell by 23%. The weak cyclical backdrop contributed to the Eurozone crisis.

What do the cycles suggest about current economic prospects? The last Juglar cycle downswing began in 2008 so the next one is scheduled to occur between 2015 and 2019. The Kitchin cycle is due to enter another weak phase in 2015-16. A recession will be likely if the two downswings coincide. The most probable year for a recession is 2016, since the Kitchin cycle will embark on another upswing in 2017-18, offsetting Juglar cycle weakness.

Thankfully, any such recession should be of average severity or even mild because the longer-term Kuznets building cycle will remain in an upswing until the early 2020s, at least. The “great recession” of 2008-09 was a once-in-a-generation event resulting from a rare confluence of the three cycles. The next boom / bust episode will be painful but not system-threatening.

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  • Anonymous

    This is more than a tad interesting, if somewhat depressing, for people who live in Ontario, Canada. Mr. Sousa, the Ontario Finance Minister, is forecasting a larger budget deficit for 2014-2015 at $12.5 billion, even though the economy is recovering or expanding, depending on whether one looks at GDP per capita or GDP tout court. In 2015-16 he sees an $8.9 billion deficit and in 2016-17 a $4.3 billion deficit, much bigger declines in the deficit in each year than the Liberals have ever achieved in their 11 years in office. How will this be possible if the economy weakens sometime in 2015 and goes into recession in 2016? Obviously it won’t. Let’s hope that Simon Ward is wrong about this but he has had a good track record with other forecasts. Andrew Baldwin

  • Michael

    An even better, and more accurate, analysis of cycles has been done by Martin Armstrong (Armstrong Economics – see his blog). The downturn will start next year and I really hope it is only “average” severity, although this is not what his model suggests.

  • Anonymous

    Thank you for the reference, Michael. I will check out his site.

  • Anonymous

    Thanks, Sam. Yes, it was a poor start to their regime indeed, to start inflating a housing bubble. Norma Bob Rae should have limited his question to personal debt as you say, so he wouldn’t have given Harper an out.
    Best regards,


  • Noo 2 Economics

    This is a very interesting site. I shall be spending a considerable amount of time on it in the coming weeks – Thanks for mentioning it!