The stock market is valued at 34.2x corporate profits. That’s a record, higher than the 33.4x peak in early 2000. But valuations tell you very little about whether a recession is coming. What they do tell you is how much damage a recession does... 1/

Jobless Claims Look Exceptionally Strong. Why Doesn’t the Labor Market Feel That Way? open.substack.com/pub/epbres…

Jobless claims are essentially at record lows. But the labor market still feels weak. Both can be true at the same time. Here’s what's going on in the labor market. 1/

Is AI boosting productivity? Here's what the early data says. 1/

The federal budget’s top 5 line items: 1940-2025

While inflation is too high, the recent move in rates is equally about the upturn in cyclical growth and reduction in recession odds.

You can see our methodology: epbresearch.com/methodology

Inflation usually ends a business cycle because it increases wage pressure and rate hikes drive up interest costs. Both higher wages and higher interest expense compress profit margins and that leads to layoffs and a pullback in capex. This cycle, despite 30%+ cumulative inflation and 500bps of rate hikes, both wages and interest expense fell as a share of corporate top-line, leading to an increase in profit margins, and thus, no end to the business cycle.

With an increasing share of income coming from government transfer payments, slowing the economy/inflation will require an uncomfortable level of crowding out in the housing sector.

What happens when AI spending slows?

This is the biggest problem in American politics. For 50 years, corporate profits averaged roughly 7% of national income. Today, corporate profits account for more than 14%. In today’s dollars, that difference is about $2 trillion per year. There is no single explanation for why this shift occurred, and it certainly isn’t just one thing. This isn’t all bad either. A larger corporate profit share helps explain why corporate earnings and asset prices have risen so strongly relative to the economy and to history, benefiting many people. But the distributional effects of this shift are substantial, and they help explain why so many people feel the current system isn’t working for them. This trend has been developing for nearly 30 years and spans political parties.

The economy has accelerating cyclical momentum and low recession risk, so it can likely handle higher interest rates in the short term. However, additional rate hikes will eventually collide with the ongoing downturn in housing and the longer-term constraint from high debt levels, which have reduced the real policy rate the economy can sustainably handle. xitter.cf/EPBResearch/status/209…

Housing has been weak for years, but the economy never entered recession. The key is the tug-of-war inside the Cyclical Economy. Housing is still contracting, while AI capex has offset much of that weakness. In this video, I explain why and what would have to change for housing to become a broader recession problem: youtu.be/5aDkYx5vv68