September Business Cycle Trends is published. The monthly report combines leading and cyclical conditions with profit-margin momentum to assess recession risk and equity-market downside. epbresearch.com/research/

Inflation usually ends a business cycle because it increases wage pressure and rate hikes drive up interest costs. Both higher wages and higher interest expense compress profit margins and that leads to layoffs and a pullback in capex. This cycle, despite 30%+ cumulative inflation and 500bps of rate hikes, both wages and interest expense fell as a share of corporate top-line, leading to an increase in profit margins, and thus, no end to the business cycle.

Is business investment broadening beyond computer equipment? That's the subject of this week's Sunday newsletter. Sign up for free: epbresearch.com/newsletter

With an increasing share of income coming from government transfer payments, slowing the economy/inflation will require an uncomfortable level of crowding out in the housing sector.

While inflation is too high, the recent move in rates is equally about the upturn in cyclical growth and reduction in recession odds.

Real corporate profits declined by 18% over 3 years leading up to the 2001 recession. Profits down, stocks up is more characteristic of a bubble. Today, that case is harder to make with real profits still rising.

What happens when AI spending slows?

Data revisions, specifically payrolls, move in the direction of economic momentum.

I focus on Leading/Cyclical data compared to Aggregate data and specifically account for expected revisions.

Deficit funded tax cuts are not a solution to affordability.

When I write that recession risk is currently low, I always get responses that the situation on the ground is quite bad. This is true. But recessions don’t start from the consumer. The situation is increasingly split. Record profits, falling paychecks.

When the Iran War started, the economy was not highly vulnerable to a recession due to extremely high corporate profit margins. Aside from a few pockets like housing which continue to weaken, that remains mostly the case today. Main Street pressure is real, but a sustained compression in corporate profitability is still required for the reductions in employment and pullback in Capex that drive the recessionary process.

This is the biggest problem in American politics. For 50 years, corporate profits averaged roughly 7% of national income. Today, corporate profits account for more than 14%. In today’s dollars, that difference is about $2 trillion per year. There is no single explanation for why this shift occurred, and it certainly isn’t just one thing. This isn’t all bad either. A larger corporate profit share helps explain why corporate earnings and asset prices have risen so strongly relative to the economy and to history, benefiting many people. But the distributional effects of this shift are substantial, and they help explain why so many people feel the current system isn’t working for them. This trend has been developing for nearly 30 years and spans political parties.

Is the economy in a position to handle higher rates? That's the subject of this week's Sunday newsletter. Sign up for free: epbresearch.com/newsletter

The economy has accelerating cyclical momentum and low recession risk, so it can likely handle higher interest rates in the short term. However, additional rate hikes will eventually collide with the ongoing downturn in housing and the longer-term constraint from high debt levels, which have reduced the real policy rate the economy can sustainably handle. nitter.net/EPBResearch/status/209…