Signs are pointing to a coming U.S. recession, according to an economic indicator that has preceded every recession over the past five decades.
It is known among economists and Wall Street traders as a “yield curve inversion,” and it refers to when long-term interest rates are paying out less than short-term rates.
That curve has been flattening out and sloping down for more than a year, raising worries among some analysts that investors’ long-term view of the market is not positive and that an economic downturn is looming.
But on Sunday, an inauspicious milestone was achieved: The yield curve remained inverted for three months, or an entire quarter, which has for half a century been a clear signal that the economy is heading for recession in the next nine to 18 months, according to Campbell Harvey, a Duke University finance professor who spoke to NPR on Sunday. His research in the mid-1980s first linked yield curve inversions to recessions.
“That has been associated with predicting a recession for the last seven recessions,” Harvey said. “From the 1960s, this indicator has been reliable in terms of foretelling a recession, and also importantly, it has not given any false signals yet.”
In a 1986 dissertation, economist Campbell Harvey identified an economic indicator that would precede the next seven recessions. That indicator is known as “a yield curve inversion.”
Courtesy of Campbell Harvey