As I have discussed in a number of recent posts, leading economic data continues to suggest a cyclical slowdown in the business cycle is upon us and is likely to continue to persist for the coming months. Furthermore, a continued slowdown in growth may precipitate a deceleration in the rate of change in inflation, indicating a transition from a stagflation macro regime to that of outright disinflation, whereby both inflation and growth decelerate together. As such, investors would do well to position their portfolios in a defensive nature and reduce risk, particularly with the notion of the likely tightening of monetary stimulus by the Federal Reserve on the horizon.
Leading Indicators: Credit Creation
Beginning with what is perhaps the best indicator of growth potential in the real economy, as opposed to just the financial economy, the G3 credit impulse is now firmly in negative territory after peaking in the latter stages of 2020.
Credit impulse is a measure of the rate of change of new credit creation as a percentage of GDP, with the G3 measure above incorporating this data from the US, China and Europe. Unlike pure monetary measures such as the M2 money supply, credit creation measures the rate of change of credit creation in the real economy, via commercial bank lending and fiscal deficit spending, and thus acts as a far better tool for predicting real economy growth. Credit impulse is effectively a leading indicator for just about everything, usually by about 10-12 months.