The forecasting approach employed here emphasises monetary analysis while seeking confirmation from leading indicators – see a post last week for the latest application.

An alternative approach with a good record – and equally shunned by the consensus – is based on economic cycles.

The three most important cycles are the 3-4 year Kitchin inventory cycle, the 7-11 year Juglar business investment cycle and the 15-25 year Kuznets cycle in housing construction / prices and associated consumer spending.

Big recessions occur when downturns in the three cycles coincide. In 2008-09, the shift of US housing from long boom to bust triggered a financial crisis and credit crunch that forced companies simultaneously to slash investment and stocks.

The view here is that the last such synchronised downturn occurred in 1974-75 when US housing construction slumped on a similar scale to recently while a surge in inflation ravaged corporate finances and liquidity, tipping the Juglar and Kitchin cycles into scheduled downswings.

Partly for this reason, previous posts have used the pattern of the global recession and recovery in the 1970s to forecast the current cycle – see, for example, here.

The chart below provides an update, comparing the six-month change in G7 plus emerging “E7” industrial output in the current cycle with that of G7 production in the 1970s. (G7 output was an adequate proxy for the world economy in the 1970s, when the E7 were small and / or isolated from the capitalistic system.)

The similarity between the two cycles remains remarkable, with the recent global economic slowdown echoing similar weakness in 1977-78 (October 2011 = December 1977). The interpretation here is that these slowdowns reflect the first post-slump downswing in the 3-4 year Kitchin inventory cycle. In the 1970s, the Juglar and Kuznets cycles were in the early stages of upswings so the Kitchin cycle downswing was insufficient to trigger another recession.

If this interpretation is correct and the current cycle continues to follow the 1970s pattern, global economic momentum should bottom around the end of 2011 and pick up during 2012 – a scenario also suggested by monetary trends but yet to be confirmed by leading indicators, as last week’s post discussed.

Put differently, with the Kuznets and Juglar cycles in bottoming or early upswing phases, a further large negative shock to the global economy is probably required to tip the recent loss of momentum over into a full-scale recession.