Can This Economy Take a Punch?

One of the main signs of the health of the global and U.S. economies is its ability to absorb a blow, and shake it off. At least that’s how Lakshman Achuthan of the Economic Cycle Research Institute sees it. That’s something to consider in light of all the fretting and hang-wringing after the U.K. vote last week to exit the European Union.

ECRI is best known for analyzing business cycles using a variety of data points. The firm uses its proprietary Weekly Leading Index as part of a broader approach to forecasting recession probabilities based on the universe of expansions, plateaus and contractions over time. It is less focused on any single economic data point, and instead uses the idea of long cycles to determine what is most likely to come next.

Achuthan’s description of what actually causes a recession is pretty compelling. The context he uses is a cyclical approach that focuses less on the shock and more on the state of the economy. In other words, look at cyclical vulnerability as a precondition for any shock to become recessionary.

Here’s a good metaphor: Imagine a person who has had a glass of wine at dinner at a restaurant. As this person returns home and walks down the street they encounter a few obstacles: Items strewn in their path, a dog running by, a crowd of pedestrians jostling them as they pass. This person is likely to remain upright and continue on their way, more or less unimpeded.

Contrast that with the imbiber who has had a few too many:  Whether this person  falls over is less a function of what bumps into them or is in the way, and more determined by what has impaired their balance. Even a modest bump might leave them sprawled on the ground . . .


Continues at: A Sober Economy Can Handle the Brexit Hit

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