AVITAS Chart of the Month – June 2015 – The Economic Yo-Yo: When is the next downturn?
The economic cycle is key to explaining aviation growth or contraction. Growth in the economy expands demand in passenger and cargo traffic which in turn creates demand for commercial aircraft. And, airplane values rise and fall on the strength of the economy. Thus, understanding the timing of the economic cycle is most important.
So, when is the next downturn? Good question. First off, it is nearly impossible to accurately project the economic cycle. After all, there are a lot of moving parts. However, history does provide some clues and, data is almost always instructive. Therefore, from the chart and data:
- The average expansion cycle—cycle, in this context, is defined as the duration from the trough month to the next peak and is determined by NBER (National Bureau of Economic Research, http://nber.org) –is about 61 months, i.e., five years in duration; note, the data only indicates the expansion duration and not the amount of expansion that has occurred; as a result, not all expansions are the same
- The average of 61 months does have a fair amount of deviation around it: for you statistical buffs, one standard deviation on the data set is about 32 months, which is quite a bit and illustrates the volatile nature of the economy
- The last four expansion periods, since 1980, lasted an average of 85 months, not counting the short 12 month expansion period in 1982; 71 months when the 12 month duration is counted
- Our current expansion period (from June 2009 to now) has produced 72 consecutive months of growth, about the same number of months of the previous downturn
- External events often play a role in causing or exacerbating a downturn; for example, the Iranian Revolution and the resultant run-up in oil prices in 1980, the period immediately following the Gulf War in 1992, and the aftermath of 9/11
- So, when is the next downturn? From a timing perspective given historical data on the expansion duration as demonstrated, a recession could happen at any time moving forward
- AVITAS’s estimate for the next downturn is that it is still a way off for various reasons, but there are some warning signals.
Three of the more obvious ones that merit watching are:- Is the Stock Market overvalued brought on by an asset bubble(s)?
- Is there turmoil on world markets which could have a cascading effect?
- Is there a growing threat of a medium to large scale external event (terrorism)?