The Zarnowitz Rule states that the steeper the downturn, the sharper the upturn. This was on hold while Covid-related restrictions were in place, but now we should expect to see it in full flight, turbocharged by fiscal stimulus. Overheating risks are rising

The US has seen a pronounced uptick in economic momentum in the last few weeks. We created our Weekly Economic Index to complement our more traditional leading indicators in the pandemic. It includes higher-frequency data so we are able to gauge the state of the US economy in close to real time. The uptick has been driven by favourable base effects from the collapse in initial claims seen last year, but also by a notable pick-up in activity, such as people taking flights.


Chart Source: Bloomberg, Macrobond and Variant Perception

The vaccination program is proceeding at a blistering pace in the US, and the collapse in Covid cases suggests the US may not be far from herd immunity, once natural immunity is added to the more than one quarter of the population who has had at least one dose of the vaccine. In the chart below we can see a K-shaped recovery everybody benefits from.


Chart Source: Bloomberg, Macrobond and Variant Perception

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


Our main leading indicators for the US confirm that the Zarnowitz Rule should be realised – potentially in spades. Both our short (6-month lead) and long (12-month lead) US leading indicators are very elevated and neither has begun to roll over.


Charts Source: Bloomberg, Macrobond and Variant Perception

The Zarnowitz Rule this time will be turbocharged by huge monetary and fiscal stimulus. The US is exceptional in this respect, turning on the taps harder than any other country. The gap between the US and rest of the world in terms of economic activity is about as wide as it has ever been.


Chart Source: Bloomberg, Macrobond and Variant Perception