Is The Business Cycle Obsolete? The Way It Ends Has Changed

Economic

Summary:

Major substantial changes in monetary policies and in the methods for calculating price measurement statistics, have altered the manner in which business cycles end.

Has the traditional business cycle become obsolete? Not entirely, but major substantial changes in monetary policies and in the methods for calculating price measurement statistics, have altered the manner in which business cycles end. Business cycles consist of two components: an economic cycle and a financial cycle. Changes in policy and price measurement have shifted the pressures and excesses of the business cycle from the economy to the financial sector. In other words, high P/E ratios have taken the place of high CPI figures.

What Causes the Ups and Downs of a Business Cycles?

Some analysts and academics argue that the traditional business cycle characterized by increasing inflation and interest rates that eventually leads to an end of the cycle no longer exists. This perspective is somewhat supported when comparing business cycles before 1990 with those after.

For instance, since 1990, every business cycle has concluded with relatively low headline and core inflation. In contrast, from 1960 to 1990, business cycles ended with inflation rates of at least 5%, sometimes reaching double digits, with official rates significantly exceeding reported inflation.

However, to assess whether the traditional business cycle is now obsolete, it is crucial to first ascertain if the expansion and recession phases are influenced by government fiscal and monetary policies, developments in financial markets, or an exogenous shock. (Note: The business cycle that ended in 2020 was initiated by an unforeseen event, the pandemic, unlike the recessions of 2000 and 2007. However, in all three instances, both headline and core inflation were relatively low).

Essentially, significant technological advancements and globalization from the mid-1990s and beyond have decreased business cycle volatility, limiting or postponing price pressures that previously would have arisen during a typical business cycle. However, there are other factors at work as well.

During the mid-1990s, the approach to conducting monetary policy shifted from focusing on money and credit growth to targeting real interest rates. Most financial market analysts, myself included, did not initially see this shift in monetary policy as a major transformation. However, it turned into one when the BLS altered its method of measuring consumer prices in 1998.

In the late 1990s, the BLS stopped surveying the owner-occupied housing market to estimate owners' equivalent rent and began using data from the primary rental market, despite the fact that these two housing markets are influenced by different factors and frequently exhibit significantly different supply and demand patterns. At the same time, non-housing financing costs were removed from the CPI, continuing the previous exclusion of housing financing costs in the 1980s.

At that time, participants in the financial market did not consider these changes in price measurement to be significant. However, they were extremely important. During the housing bubble of the early 2000s, while housing prices experienced double-digit increases, the CPI indicated housing cost increases of only 2% to 4%. If the BLS had not implemented the measurement changes in the late 1990s, reported inflation would have been easily double what was reported.

(Note: The BLS excluded housing prices from the CPI in 1983, but continued to survey owner-occupied housing to estimate the implied rent for homeowners, maintaining a direct connection between housing inflation and increases in owners' rent. This connection was severed with the measurement changes in 1998).

The removal of non-mortgage interest costs also had a big impact on reported inflation. A joint research project by economists from Harvard and MIT found that the CPI from 2021 to 2023 would have been twice as high if consumer financing costs for were still included in price measurement.

Still, altering the methods for measuring prices had notable economic and financial impacts. Indeed, the revised CPI measure exhibits significantly less cyclicality, leading the Fed to aim for lower nominal and real interest rates than it would have if the BLS had not made these adjustments. This has led to considerably higher P/E ratios since 2000.

Economic downturns can stem from asset markets, as shown by the stock market crashes in 2000 and 2007, followed by recessions. The S&P 500 is trading at 22 times the projected earnings for 2025, and even higher compared to free cash flow projections. Other market indicators, such as the price-to-sales ratio, are also exceptionally high.

Therefore, the equity market is susceptible, particularly to an additional increase in market interest rates. Historically, the risk of recession increases when the yield on the 10-year Treasury surpasses the growth in Nominal GDP. According to current figures, there is merely a positive spread of 20 basis points with GDP outpacing the yield on the 10-year Treasury. However, current yields might still be too high given the lofty levels of the equity market.

However, the primary threat to the equity market and the economy lies in the fiscal strategies of the new administration. With the existing budget approaching $2 trillion, it is not financially viable to make the 2017 tax cuts permanent, as they are estimated to cost $4 trillion over the next decade, along with introducing further federal tax cuts. Even if the new Administration succeeds in reducing federal spending, it will not be significant enough to offset both past and new tax cuts, resulting in a budget deficit as large or larger than the current one.

More than three decades ago, President Bill Clinton shifted from his new economic agenda, which featured a middle-class tax cut, to a deficit-reduction strategy in response to the threat of increasing interest rates. At that time, the US was dealing with projected budget deficits ranging from $300 to $400 billion, compared to today's deficits exceeding $2 trillion.

Should the Trump economic team ignore the lessons from 2000, 2007, or even 1993, there is a genuine risk of a significant increase in interest rates. Market interest rates have previously impacted the fiscal strategies of a new president, and they have the potential to do so again, if not, the risk of financial chaos will increase.

Sources：Haver Analytics

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Warren Takunda

Stocks

Global shares mostly rose Thursday after the U.S. Federal Reserve opted not to cut interest rates for the first time since it began trying to help the economy through easier rates in September.

Some Asia-Pacific markets remained closed for the Lunar New Year holiday.

Investors remain uncertain over the outlook for the U.S. economy and over what’s ahead from the administration of President Donald Trump.

France’s CAC 40 gained 0.3% in early trading to 7,898.63, while Germany’s DAX edged up 0.3% to 21,702.91. Britain’s FTSE 100 added 0.2% to 8,572.78. U.S. shares were set to drift higher with Dow futures up 0.4% at 45,053.00. S&P 500 futures rose 0.5% to 6,097.00.

In Asia, Japan’s benchmark Nikkei 225 rose 0.3% to finish at 39,513.97. Australia’s S&P/ASX 200 gained 0.6% to 8,493.70.

SoftBank Group’s stock dipped 1.1% after reports it was in talks to invest in OpenAI, while Nissan Motor’s shares finished 1.4% higher after the Japanese automaker confirmed plans to reduce production in the U.S.

The Fed’s latest decision could hint at rates staying on hold for a while following their swift drop at the end of 2024. Lower rates would help the economy by making it cheaper for U.S. households and companies to borrow, but the downside is they could also fuel more inflation.

Fed Chair Jerome Powell said the U.S. central bank could cut rates if inflation slows further or if the job market suddenly weakens. But “right now, we don’t see that, and we see things as in a really good place for policy and for the economy, and so we feel like we don’t need to be in a hurry to make any adjustments.”

Earlier in the week, there was disruption driven by doubts about the artificial-intelligence boom, after Chinese upstart, DeepSeek said it developed a more affordable large-language AI model.

In energy trading, benchmark U.S. crude declined 18 cents to $72.44 a barrel. Brent crude, the international standard, fell 35 cents to $76.23 a barrel.

The U.S. dollar cost 154.56 Japanese yen, down from 155.24 yen. The euro inched down to $1.0420 from $1.0423.

Source: AP

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Warren Takunda

Economic

The Federal Reserve is independent but not immune to political interference, as markets are finding out under Trump's second reign.

The President's latest intervention in U.S. monetary policy overshadowed the Federal Reserve's decision to keep interest rates unchanged on January 29.

Following the decision, President Donald Trump told reports, "Jay Powell and the Fed failed to stop the problem they created with Inflation."

"If the Fed had spent less time on [diversity, equity and inclusion], gender ideology, ‘green’ energy, and fake climate change, Inflation would never have been a problem," he added.

The Fed's first policy decision of 2025 comes after he told the World Economic Forum the Fed should cut interest rates "a lot", adding that he would "let it be known" if he disagreed with Chair Jerome Powell's decisions.

The implications for the Dollar are significant, as it is clear Trump wants lower interest rates, which ultimately implies a lower Dollar. A weaker currency in turn helps U.S. manufacturers and assists Trump in rebalancing global trade imbalances. A lot of focus has been on tariffs as the tool to achieve this, but he certainly needs the assistance of the currency.

This all suggests the downside in the Pound to Dollar exchange rate is better protected and limits the potential for a fall to 1.20 and below while firming the outlines of a more sustained recovery in the coming months.

The Fed kept interest rates on hold and said U.S. inflation remained "somewhat elevated" and removed an earlier reference noting "progress" towards hitting its 2 per cent goal.

Pre-Trump 2.0, would be considered a 'hawkish' assessment and would have bolstered the case for a Dollar upside.

However, markets now need to second-guess the policy framework within the context of the activist U.S. executive.

"Damage to the Fed's independence does not have to happen in a big bang. It can also take place at the margin and perhaps only produce a slightly looser monetary policy than would have been expected, ceteris paribus, with a normal US government," says Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

"Perhaps one day it may be necessary to decide on one or two interest rate cuts that would otherwise not have been decided on. Or to postpone a rate hike," he explains.

A sign of an at-the-margin shift in the Fed was the exit from the NGFS, just days before Trump was inaugurated.

Leuchtmann says he is not concerned about social media interventions, noting that Trump was prone to commenting in his first term, and the Fed's independence wasn't damaged.

Instead, the more concerning signal should be Trump's assertion that the Fed is "absurdly overstaffed," which suggests it could become a target for staff reductions under the DOGE programme.

"What these people do has such an immense impact on the fate of the US economy that there is no room for staff cuts. Anyone demanding this is really up to something else: weakening the Fed," explains the Commerzbank analyst.

Source: Poundsterlinglive

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Warren Takunda

Stocks

London stocks were set to fall at the open on Thursday following a downbeat close on Wall Street, after the Federal Reserve stood pat on interest rates, and ahead of the latest policy announcement from the European Central Bank.

The FTSE 100 was called to open down around 11 points.

Kathleen Brooks, research director at XTB, said: "The market is certain that the ECB will cut interest rates at this meeting and is 100% priced for a cut. We do not expect the ECB to disappoint market expectations. The impact from the rate cut is not expected to be particularly market moving, instead, the focus will be on ECB President Christine Lagarde’s press conference at 1345GMT and the ECB statement that will accompany the decision.

"The market is already expecting an 88% chance of a cut in March, and a decent chance of a further cut from the ECB by June and a total of 3.5 cuts in 2025 in total. Thus, there is a limit to how dovish Lagarde can be at this meeting. There is a growing chance of a 50bp rate cut at some point in the first half of the year, and Eurozone interest rates are expected to end 2025 just above 2%.

"However, some analysts argue that rates need to fall further to boost the Eurozone economy due to multiple threats facing the currency bloc. Expectations are on the extreme dovish side as we lead up to this meeting, the question is, will Lagarde deliver on these dovish expectations?"

In UK corporate news, corporate software group Sage said it has made a strong start its new financial year with revenues rising by a tenth in the first quarter, as all regions delivered solid growth.

Revenues totalled £612m in the three months to 31 December, up from £558m a year earlier, with Sage Business Cloud revenues up 13% at £502m.

"We reiterate our guidance for the full year, as set out in our FY24 results announcement, as we continue to focus on efficiently scaling the group," said chief financial officer Jonathan Howell.

Airtel Africa reported strong operational growth for the nine months ended 31 December, with its customer base increasing 7.9% to 163.1 million, data usage per customer rising by 32.3%, and mobile money subscribers growing by 18.3%.

Revenue rose 20.4% in constant currency but declined 5.8% in reported terms due to currency devaluation, while EBITDA fell 11.9% to $1.68bn, although margin improvements were seen in the third quarter.

The company said it continued reducing foreign currency debt, noted the launch of a second $100m share buyback, and maintained its capital investment strategy despite challenges from currency fluctuations and increased costs.

Source: Sharecast

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Winkelmann

Economic

Commodity

Critical metals, uranium and gold will shine this year driven by accelerating deglobalization and energy security demands, Sprott said in a special report Monday.

Broader trade conflicts affecting allies and adversaries alike could reduce business investment and global GDP, while decoupling due to rising protectionism and trade tensions will likely accelerate in sectors that are strategic like AI, advanced technology, finance and defence, the asset management company stated.

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All of this could drive electrification efforts into higher gear and sustain demand for critical minerals, uranium and gold, said Sprott, which manages some $34 billion in assets.

Self-reliance and reduced foreign dependence will be key trends in the energy sector this year as countries further decouple and populist and nationalist ideologies come to the fore. This could augment rivalries over critical resources, with resource nationalism driving energy policy.

Prices of commodities tied to critical energy materials such as uranium, copper and silver are already outperforming those commodities affected most by China’s economic policies such as iron ore and metallurgical coal, and this trend is likely to persist in 2025, Sprott said.

EVs thwarted

President Donald Trump’s intention to roll back policies supportive of electric vehicles and renewables has introduced uncertainty and could include eliminating a $7,500 tax credit for EVs while reducing dependence on batteries and critical minerals from China. But it may boost EV sales in the short term, BMO Capital Markets said on Wednesday.

Trump has signed an executive order cancelling Biden’s target of electric vehicles to be half of auto sales by 2030, and the new president is redirecting unspent government funds for charging stations. The order also seeks to keep combustion engine autos in play longer by tweaking rules for states and the Environmental Protection Administration, but that tactic may be challenged.

If Trump repeals all the tax credits under the Biden-Harris administration’s Inflation Reduction Act, solar, wind and energy storage construction would be 19% less over the next five years, according to an analysis by Bloomberg New Energy Finance (BNEF), a unit of the news wire. But even so, renewables would more than double because they have momentum, it added.

What’s more, a full repeal of existing clean energy legislation “appears unlikely” according to Sprott.

Political shifts, inflation and geopolitical tensions mean that market volatility will be a key characteristic this year, Sprott said. The risk of aggressive tariffs and trade wars “casts a strong shadow on risk assets” and policy uncertainty “could dampen investor confidence.”

Nuclear is back

As a zero-emission, baseload energy source, nuclear energy is well positioned in 2025 to support the energy required in AI’s data centres, machine learning and digital infrastructure. This year Sprott sees “accelerated investment in both AI-driven applications and nuclear energy infrastructure as their synergies become more apparent.”

Prices for uranium in the short-term market hit a 16-year high last year and Sprott, which manages the world’s largest physical trust of the metal at $4.9 billion, says the market for the nuclear fuel will continue to grow and remain in a bull market this year. (The average and maximum uranium spot prices in 2024 were their highest in the last six years.)

“Regardless of spot price movements, uranium’s underlying fundamentals continue to grow stronger, driven by accelerating demand, supply constraints and favorable nuclear energy policies,” Sprott noted.

At the same time, current global uranium mine production is insufficient to meet the world’s nuclear reactor needs and there is a structural deficit. While junior miners are restarting mines due to historically high uranium prices, their efforts will unlikely close the supply-demand gap, Sprott said.

Geopolitics and instability in uranium producing countries like Niger and Russia also adds uncertainty.

Sprott argues that while some utilities are covered, others do not have the appropriate procurement strategies in place.

“We believe that available-for-sale inventories, critical to utilities, have been depleted,” Sprott said. “Utilities’ needs may cascade down the supply chain from conversion and enrichment, where prices are hitting all-time highs, to U3O8 itself.”

Copper imbalance grows

Copper is one of the most compelling commodities this year, according to Sprott. AI and data centres rely on copper for infrastructure and its “new omnipresence in the energy-intensive future of global economies may shield it from tariffs proposed by the incoming Trump administration, a threat that has been weighing on the copper market post-election.”

Supply remains a concern and Sprott expects the supply deficit will widen through 2025 and beyond. Production disruptions are expected to continue in the coming quarters, and insufficient investment in future copper supply is a “critical bottleneck.” Declining grades and long project lead times have also constrained supply.

In addition, tighter availability of copper concentrate could put additional upward pressure on prices, while “overcapacity in the smelting sector adds pressure to the upstream segment of the supply chain and may continue to depress treatment charges.”

The gold price jumped 27% in 2024, largely due to central bank and sovereign purchases, and Sprott expects demand from this sector will continue to lift gold prices this year.

“Most central banks expect the US dollar to decline as a proportion of their total reserves, with gold’s share expected to rise over the next five years,” Sprott said. Inflation and geopolitics will also be supportive of the precious metal in 2025.

Sources：mining.com

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Adam

Economic

The Surge in U.S. Corporate Exodus from China

The trend of American businesses withdrawing from China has intensified, with a recent survey by the American Chamber of Commerce in China (AmCham China) revealing that 30% of surveyed companies have either started or are actively considering diversifying their supply chains in 2024. This figure surpasses the previous peak of 24% in 2022 and significantly exceeds the 23% recorded in 2017 when the Trump administration first imposed tariffs on Chinese goods.

The combination of escalating U.S.-China tensions and the lasting economic impact of the COVID-19 pandemic has played a critical role in this shift. Michael Hart, President of AmCham China, emphasized that the strict lockdown measures during the pandemic made businesses aware of their overdependence on China. As a result, supply chain diversification has become an imperative rather than a strategic option.

Alternative Investment Destinations and the Rise of Reshoring

Southeast Asia and India continue to be the top choices for American firms relocating production. However, an increasing number of businesses are also considering moving operations back to the United States, with the proportion rising to 18% in 2024 from 16% the previous year. This growing preference for reshoring aligns with U.S. government policies aimed at reducing reliance on Chinese manufacturing and strengthening domestic production capabilities.

Nevertheless, the survey also indicates that a majority—67%—of U.S. companies in China still do not have plans for relocation, though this percentage has declined by 10 points compared to 2023. This suggests that while many firms are diversifying their supply chains, they are not entirely abandoning China, recognizing its irreplaceable role as a major market.

Key Challenges: Geopolitical Risks and Domestic Competition

Geopolitical friction remains the most significant challenge for American firms operating in China, with over 60% of survey respondents citing U.S.-China tensions as their primary concern for 2025. The second major challenge is the increasing competitiveness of both state-owned and private Chinese enterprises, which pose mounting pressure on foreign firms.

Further complicating the landscape, former President Donald Trump recently announced plans to impose an additional 10% tariff on Chinese imports, set to take effect on February 1, 2025. If implemented, this could accelerate the exit of more companies from the Chinese market.

Economic Deceleration and Changing Market Dynamics

China’s economic slowdown further adds to the uncertainty. Weak consumer spending has persisted since the pandemic, prompting the Chinese government to roll out stimulus measures to revive growth and stabilize the struggling real estate sector. According to the AmCham China survey, the proportion of firms that no longer view China as their primary investment destination has doubled compared to pre-pandemic levels, reaching 21%.

Despite these challenges, analysts highlight that opportunities remain, particularly in sectors driven by domestic consumption. Many technology, industrial, and consumer goods companies still view China’s growing middle class as a lucrative business prospect. Hart reaffirmed that while companies are diversifying, China remains a market of significant scale and importance.

Overall, the increasing relocation of U.S. businesses from China reflects a broader realignment of global supply chains, influenced by geopolitical uncertainty, economic conditions, and policy decisions. While many firms are hedging risks by diversifying into Southeast Asia, India, and the U.S., China continues to be a critical market. The coming years will determine whether this trend remains a measured adjustment or escalates into a deeper decoupling of U.S.-China economic ties.

Source: PBS

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Adam

Commodity

Economic

Government Action to Address Food Supply Vulnerabilities

Japan is taking proactive steps to prevent a potential food crisis, with the Ministry of Agriculture, Forestry, and Fisheries (MAFF) drafting a contingency plan to ensure stable supplies of key agricultural products. The proposed measures, presented during a Liberal Democratic Party (LDP) committee meeting, highlight the growing risks Japan faces in securing its food supply.

Under the plan, if domestic production of rice or other essential food items drops by 20% or more—leading to sharp price increases—the government will require farmers to submit plans for increasing production. The directive covers 12 staple food categories, including dairy products, livestock, soybeans, wheat, and sugar.

The proposal, set for approval by the Japanese cabinet on April 1, 2025, introduces penalties for non-compliance, ensuring that farmers adhere to mandated production adjustments. However, these emergency measures will not be enforced if Japan can offset domestic shortfalls through imports.

A Response to Global Food Supply Disruptions

Japan’s growing focus on food security stems from multiple global and domestic challenges. Recent disruptions in agricultural supply chains—driven by extreme weather events and geopolitical conflicts such as the war in Ukraine—have underscored the fragility of global food markets. With increasing unpredictability in food production worldwide, Japan is preparing for potential disruptions that could impact its heavily import-dependent food system.

Japan imports more than 60% of its food, making it one of the most food-import-reliant developed nations. Any global supply chain disturbances—such as export restrictions from key supplier nations—could have immediate and severe consequences on domestic food availability and prices.

Japan’s Aging Agricultural Workforce: A Critical Weakness

One of the most pressing concerns affecting Japan’s food security is the rapid decline of its agricultural workforce. Government data reveal that in 2023, Japan had approximately 1.16 million individuals engaged in agriculture, a staggering drop from 2.4 million in 2000. Even more concerning, only 20% of farmers are under the age of 60, signaling a critical labor shortage that threatens long-term agricultural sustainability.

The diminishing number of farmers, coupled with a lack of young replacements, has raised alarms over Japan’s ability to maintain domestic food production. Without new policies to attract younger generations into agriculture, the country risks becoming even more dependent on food imports, heightening its vulnerability to global supply chain shocks.

Will Imports Be a Reliable Solution?

While the proposed emergency measures primarily focus on increasing domestic production, the government acknowledges that imports will remain a crucial fallback option. If global trade conditions allow, Japan will prioritize supplementing its food supply through imports rather than enforcing production mandates.

However, given rising global protectionism in food exports and unpredictable climate-related disruptions, relying on imports carries significant risks. Countries with strong agricultural production, such as the U.S., Australia, and Thailand, could impose export restrictions in times of crisis, leaving Japan exposed to potential supply shortfalls.

To mitigate these risks, Japan is also investing in diversifying its import sources and exploring technological innovations in agriculture, such as vertical farming and automation, to enhance domestic productivity.

Strengthening Food Security in an Uncertain Future

Japan’s latest food security plan reflects the growing recognition that global supply chains are becoming increasingly fragile. By mandating production adjustments and enforcing compliance measures, the government aims to safeguard domestic food stability in the face of potential crises.

However, long-term challenges remain. Japan’s reliance on imports, coupled with an aging agricultural workforce, poses serious risks to its food security. While emergency measures can provide short-term relief, the country will need to implement broader agricultural reforms—such as incentives for young farmers, investments in sustainable farming technology, and strengthened international trade partnerships—to build a more resilient food system.

As global food security risks intensify, Japan’s ability to adapt and secure its food supply will be a critical factor in maintaining economic and social stability. The coming years will determine whether these emergency measures serve as a temporary fix or the foundation for a more sustainable agricultural future.