Perhaps the single most important insight in getting “Ahead of the Curve” in forecasting economic cycles 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 Y/Y percent-change basis to provide clarity) peaks and begins to slow. By the time real-GDP growth 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.

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.* 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. Economists and reporters 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 represent the front end of the economic cycle.