US Economy Predicted to Face More Frequent Boom-Bust Cycles, Deutsche Bank Says

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Deutsche Bank analysts predict a shift in the US economy from its 40-year phase of predominant growth, spanning 1980 to 2020, towards a pattern marked by more frequent boom-bust cycles and recessions. This prediction, made on Monday, is based on several factors including rising inflation which could limit the flexibility of central banks both domestically and globally as they strive to balance economic growth.

The analysts also highlighted that the USA's debt-to-GDP ratio has reached unprecedented highs in recent decades. This development raises questions about the sustainability of using deficits to prolong business cycles, given the increasing structural borrowing costs. Despite these concerns, the analysts pointed out a silver lining: frequent recessions often lead to stronger long-term growth.

In recent discussions among investors and traders about the timing and likelihood of a US recession, Deutsche Bank's team has identified four key indicators that typically precede a recession within a 12-month period: inflation increase, yield curve inversion, short-term rates rise, and oil prices surge. Since January 1980, the US has experienced six recessions, with four lasting between two and eight months.

Deutsche Bank's team also believes that artificial intelligence could disrupt several industries and jobs, potentially marking an end to the era of prolonged business cycles. They argue that this doesn't necessarily have negative implications for long-term economic performance but could introduce greater macroeconomic volatility.

Historically in the US, recessions have contributed significantly to drops over 10% in the S&P 500 index. The median and average reductions during these recessions were -21% and -26% respectively, with the largest recorded selloff occurring in 1932 during the Great Depression.

Nonetheless, Deutsche Bank's research shows that despite these downturns, the US has consistently outperformed its G7 counterparts in terms of long-term equity performance, thanks to a more business-friendly financial system. This conclusion is supported by data on nominal and real multi-asset class returns for numerous developed and emerging market economies, spanning over 200 years where possible.

In April 2022, Deutsche Bank was the first major bank to predict a US recession. This forecast seemed prescient when an almost 5% fed-funds rate was observed in September of the same year, half a year before it became a reality. As of Monday, all three major US stock indexes showed modest increases in afternoon trading in New York, as investors anticipated the Federal Reserve's forthcoming policy announcement.

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