Another Recession Indicator Is Flashing Red

via morningstar:

We are primarily funded by readers. Please subscribe and donate to support us!

Even as stock investors cheer signs of inflation peaking, the bond market’s best-known predictor of recessions is showing its clearest signal yet that there is trouble ahead for the US economy.

It’s known in Wall Street lingo as an inverted yield curve, and in recent days it has moved to its most extreme levels since the 1982 recession thanks to a big drop in long-term bond yields. When this dynamic has been in place over the last two decades, in each case a recession has followed. (For a look at the history of yield curves and recessions, see our earlier story here.)

While an inverted US Treasury yield curve isn’t known as a predictor of how deep or how long a recession may last, or even when a recession will begin, market watchers say the current message is unmistakable.

“Historically, when you get a sustained inversion like this […] it’s a very reliable indicator of a recession coming,” says Duane McAllister, a senior portfolio manager at US firm Baird Advisors.

That leaves many market observers saying the real question isn’t whether there will there be a recession, but what it will look like. Will it be shallow or deep? Short or drawn out?

Money managers and economists are wrestling with these questions. Many say the outlook is highly uncertain against a backdrop of recent economic data painting a somewhat conflicting picture. On the one hand, inflation has started to come down from 40-year highs, which should give the Federal Reserve the ability to slow the pace of interest-rate increases.

However, inflation remains extremely hot despite its recent easing. At the same time, job growth and consumer spending remain robust. In fact, the Atlanta Fed’s GDPNow forecast, a running estimate of economic growth, is clocking in an extremely strong 4.2% rate of growth for the fourth quarter. Those indicators suggest the Fed can’t afford to stop raising rates too early and risk embedding higher inflation into the economy, analysts say.



Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.