The recession should probably be here by now
According to Wall Street's most talked-about recession indicator, the long-awaited economic downturn should be nearly upon us.
The big picture: And yet, there's virtually no evidence the U.S. economy is contracting, putting this indicator's run of correctly predicting recessions — it's called every one since 1955 — in peril.
Context: We're talking about the inverted yield curve, which has been in territory that supposedly signals a looming recession for nigh on a year.
- The curve "inverts" when yields on short-term government bonds are higher than those on long-term bonds — the opposite of the usual state of affairs.
The latest: The curve remains inverted but is clawing its way back toward normal, as the yield differential between these two securities shrinks.
- Back in May, the three-month Treasury bill was yielding almost 2 percentage points more than the 10-year Treasury note. Now, the gap has narrowed to about 1 point.
- In the bond world, this is known as a "re-steepening" of the yield curve.
The intrigue: According to yield curve watchers, the initial inversion is what signals a coming recession — usually within 18 months or so. But the recession tends to actually arrive once the curve starts re-steepening.
What they're saying: "There is re-steepening that happens sometimes before and definitely during a recession," said Campbell Harvey, a professor of finance at Duke University whose research is credited with first identifying the predictive power of the yield curve, in an email exchange.
- "In the last four recessions, re-steepening happened before the recession began," he said, adding that it's possible that recession could still be in the cards.
- "It is far too early to say if there is a false signal," he added.
State of play: Unemployment is at 3.6%. Economists are raising their forecasts for third-quarter growth. There's a boom in manufacturing investment.
💭 Our thought bubble: Anything can happen, but this doesn't look, feel or smell like an economy teetering on the brink.
The bottom line: The last few tumultuous years — including the COVID crisis, the reignition of inflation, the invasion of Ukraine, and a new economic freeze for the U.S. and China — seem to have rendered some long-standing approaches to divining the economic future fairly useless.
- The next few months may show whether that's the case for the inverted yield curve, too.