Perhaps the single most important insight in economically getting “Ahead of the Curve” is that of recognizing the lagging characteristic, even deceptiveness, of “recession” as a measure of economic downturn. Businesses suffer loss of sales, inventory buildup, and slowing-to-declining corporate profits when the rate of growth in economic activity (real GDP, measured here on a year-over-year percent change basis to provide clarity) begins to slow from its peak.

Note that bear markets (shown here in the vertical yellow shaded bars) almost always begin when the rate of growth in real GDP is at or still close to its peak (see red arrows), and continue as the rate of growth continues to slow.* By the time Real GDP is approaching “zero” growth or an actual decline (“recession”), most of the economic damage has been done, it is far too late for businesses to adjust, and the bear market is largely over. Most bear markets end (see blue arrows) when the year-over-year rate of growth in real GDP is at or still approcaching a bottom.

Recessions are denoted here by the black boxes at the bottom of the chart. Note how belated they are as a measure of economic harm. Even forecasting a recession by six months is of only modest value. And the reality is that the onset of recession is usually debated by economists well after the recession has actually begun. Thus, those who speak of forecasting recessions are, in fact, focusing on predicting a lagging indicator that has little or no pragmatic use in avoiding the effects of an economic slowdown.

Businesses and investors must instead focus on leading indicators of rates of economic growth, particularly drivers of consumer spending, which represents the front end of the economic cycle.