"Peak Recovery" and business cycle calculus

 

Starting with simple concepts and then adding complexity is a good way to address difficult problems. Many pundits have started to talk about "Peak Recovery" as some newfound concept, yet the discussion focus is just about business cycle calculus. Any business cycle can be described by the level, trend, and acceleration of GDP or its components, yet these simple concepts get lost in macro discussions. 

Peak recovery focuses on the second derivative of growth. Reflation is a combination of positive trend and acceleration; first and second derivatives. The point of peak recovery can be described as when the economy is still growing, positive trend, but switches to a slower rate, albeit positive. This concept becomes slightly easier if you think of the business cycle as a sine wave. The derivative of the sine wave is a cosine. The inflection point or peak recovery will be when the cosine, the derivative, has a maximum value.   

When the US economy started to open, there was positive acceleration in growth. Now that most states are open and the catch-up of spending is being achieved, acceleration will slow although growth may still be strong as measure by the positive trend.  

Hitting peak recovery is the inflection point between early recovery to the normalcy of mid-cycle growth. The economy is growing but with less acceleration. There can be disagreement on whether this is occurring, but there is no question that the changing signs of GDP derivatives is a useful for determining where you are in the economic cycle. If acceleration is slowing, upside surprises are less likely. We are seeing this effect with Citibank and Bloomberg surprise indices. 

Our basic macro adage is that you cannot predict where you are going until you know where you are at. You cannot get strengthening financial price trends if macro acceleration is declining. 

Yet, the basic question of determining where you are at is not often easy - just ask policymakers and investors. Consensus does not often exist. Definition of terms may also be contested.