US Recessions – Contractions and Expansions

The Zarnowitz Rule, which we discussed last year, states simply that the “steeper the downturn, the sharper the upturn”. Now restrictions are being eased, the Zarnowitz Rule can begin to “operate”, resulting in a potentially huge upturn.

There is a good relationship between the size of a contraction, and the size of the subsequent expansion (next chart). Based on a framework from the Cleveland Fed, we can define contractions and expansions using peaks and troughs in unemployment. The 2021 contraction/expansion is still “work in progress” while the unemployment rate continues to fall, but we can see how extreme this recession and expansion already is.

Chart Source: Cleveland Fed, Bloomberg, Macrobond and Variant Perception

This text and chart is an excerpt from the report dated April 22, 2021, US Overheating Risk, from Variant Perception.