Markets and economists are increasingly certain of recession
Add Axios as your preferred source to
see more of our stories on Google.
Economists and market indicators seem increasingly certain that the U.S. is either already in a cyclical downturn, or soon will be.
Driving the news: Perhaps the most-watched market indicator for predicting recessions — a so-called inversion of the yield curve between 3-month and 10-year Treasuries — is now near at hand.
How it works: An inversion is a bit of bond market jargon that describes an unusual situation in which shorter-term Treasury yields rise above yields on Treasuries that mature later.
- In recent days, the yield on 3-month Treasury bills shot sharply higher, while the yield on the T-note has been steady.
- Now, the 10-year is yielding just 0.12 percentage points more than the 3-month bill — perilously close to going negative, aka inverting.
Why it matters: While large parts of the yield curve have been inverted for months, the relationship between 3-month and 10-year Treasuries has a special status.
- Over the last 60-odd years, when this particular part of the Treasury yield curve has inverted, a recession has followed within two years.
- That makes it perhaps the single best market-based indicator of recessions.
- Check out this Q&A from Duke University finance professor Campbell Harvey, the dean of yield curve watchers, for more.
Zoom out: The yield curve isn't alone.
- Since yet another hotter-than-expected inflation report earlier this month, economic forecasters have turned increasingly dour.
- An economic model from Bloomberg now suggests a 100% probability of a recession within 12 months (though a separate Bloomberg survey puts it at 60%).
- A similar Wall Street Journal poll of economists showed the odds at 63% in August, up from 49% in July.
Unemployment remains remarkably low, but traditional rules of thumb say we're already in a recession since we've had two straight quarters of contracting GDP.
- The official call on recessions is made by the NBER, however.
The bottom line: Both the markets and economists seem to think the current downturn, soft patch, or whatever you want to call it, is going to get worse.
