My diffusion index for the USA monitors 56 series. And over the last couple of months it's been rising, and it has just risen above the 50% "recession mark". This raises the question: has the US economy begun a new cyclical upswing? If you look aver the last decade, the US economy has experienced several mini cycles. Is this another? Or is it the beginning of a major new upswing?
If we compare my diffusion index to a average of 4 Fed regional surveys, it's clear that there was a bit of a bump in the first few months of this year, when the slowdown paused. But in June these survey fell again. So probly the rise in my diffusion index is just a little rebound before it falls again. And the likelihood is that June data for the diffusion index will be revised down.
This is confirmed by my longer-leading index. The chart shows my longer-leading index plotted shifted forward by 18 months. Over the last 9 years, the lag has been closer to two years. But even with an 18 months lag between the longer-leading index and the economy, the downturn looks more likely to end in mid 2020, not mid 2019. My conclusion is that this is just a bump on the downward slope of the US economic cycle.
Either way, whether it's a mini rebound or the beginnings of a new cyclical upturn, the probability is that the Fed will not be cutting rates just yet. For the share market, this means that euphoria is misplaced. Indeed, if the economy does start to pick up, we can expect a soggy patch in the share market for a while, as market expectations for the Fed Funds rate shift. It would also mean that the bond bull market is temporarily paused, and that the US dollar will continue to rise. It is going to be very interesting to follow the evolution of US data for the next few weeks. As I said above, it is most probably a mini bounce which won't last. We'll see.
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