Ukraine and the Business Cycle: A Reminder

The Russian invasion of Ukraine has created uncertainty and introduced downside risks to expected economic growth. However, it is critical for individuals and business leaders to keep sight of the bigger picture and to avoid the heuristic trap of falsely assigning culpability for shifts in the business cycle.

For nearly two years, ITR Economics has expected that the peak growth rate for the US Industrial Production Index would come during the current quarter: 1Q22. Our list of benchmark Leading Indicators nearly unanimously point to this timing for a peak in the business cycle.

As the business cycle turns downward, many analysts and pundits will look for a culprit. The timing of the invasion is such that this conflict will appear a tempting choice. However, while there are specific risks – including higher energy prices which may result in eroded consumer purchasing power – the conflict has not reached the intensity necessary to prompt a global economic contraction. Instead, consider the Leading Economic Indicators. Trend reversals in the leading indicators have been occurring since mid-2021, providing ample warning for businesses.

Ascribing blame is a very human reaction to an uncertain situation. However, it is important not to lose sight of the true drivers of this economic cycle. Misidentifying the reason for the slowdown could skew decisions made in reaction to current events. Whether or not the conflict in Ukraine is resolved rapidly, the fundamental drivers of Phase C, Slowing Growth, will persist in the US macroeconomy and must be taken into account.

Don’t lose sight of the Leading Economic Indicators – they always cut through the noise and reveal the fundamentals.