Recession indicator could be a ‘broken odometer’ for the economy, says expert
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Experts point to an impending downturn in the US economy. The question was when.
Now, however, some companies and experts are walking back those predictions and questioning the validity of the once-trusted recession indicator called yield curve inversion.
“While it’s true that the yield curve has predicted recent recessions, recent experience shows that it has been something of a broken odometer for the economy,” said Mervin Jebaraj, head of the economic policy survey during the recession National Association for Business Administration.
In its most recent survey of economists, NABE found that more than two-thirds of respondents were at least somewhat confident that the Federal Reserve can help the U.S. economy have a soft landing. Meanwhile, 20% believe the U.S. is either in a recession or will enter a recession in 2023.
Wall Street firms have also signaled increasing optimism that a recession – typically defined as two consecutive quarters of declines in gross domestic product – can be avoided.
Goldman Sachs now predicts a 15% chance of a recession (up from 20%). Others, including Bank of America and JP Morgan, have also recently backed away from stronger recession calls.
According to the NABE survey, without a strong labor market, the United States would have already entered a recession.
Economists are divided on the yield curve
But the NABE results also showed that economists are divided over what a key recession indicator – the inversion of the yield curve – reveals about the direction of the U.S. economy.
The yield curve is a diagram that shows the relationship between the yields of fixed income securities and the remaining maturity of the securities.
When the U.S. Treasury yield curve slopes upward and long-term Treasury bonds offer higher yields, that is considered normal, according to NABE’s Jebaraj, who also serves as director of the Center for Business and Economic Research at the Sam M. Walton College of Business at the University of Arkansas.
“Generally, the perception is that the longer someone holds the Treasury, the longer they hold the Treasury, they should be offered higher interest rates because they are giving away their money for a longer period of time,” Jebaraj said.
However, when investors believe that the short-term economic outlook is worse than the long-term economic outlook, this leads to higher short-term Treasury yields and a downward-sloping yield curve. The inverted yield curve is often viewed as an indicator of a recession.
No one would argue that the yield curve could have predicted a global pandemic and the short recession that followed.
Mervin Jebaraj
Chair of Economic Policy Surveys at the National Association for Business Economics
The latest NABE survey shows economists are divided on what a yield curve inversion means for the U.S. economy.
The most popular conclusion – at 38% – was that it points to falling inflation without a recession. But almost as many respondents – 36% – said they believe this portends a recession in the next 12 to 18 months. Another 14% see low long-term bond premiums and no recession.
Under normal circumstances, Jebaraj said, yield curve inversions are a pretty good indicator of recessions.
But that wasn’t always the case. Even though the yield curve inverted in 2019, this is not necessarily an indicator of the recession in 2020.
“No rational person would argue that the yield curve could have predicted a global pandemic and the short recession that would follow,” Jebaraj said.
Current recession predictions are based largely on what has happened in the past, he said. Whenever the Federal Reserve aggressively raised interest rates, it triggered a recession.
Other experts are also waiting to see what the indicator means for the US economy.
Any time an inverted yield curve lasts longer, analysts typically say, “This time it’s different,” noted Barry Glassman, a certified financial planner and founder and president of Glassman Wealth Services.
“Maybe it’s different this time,” said Glassman, who is also a member of the CNBC FA Council.
“But there are reasons why it is usually an indicator that a recession is imminent in the short to medium term,” he said.
Recession or no recession, the advice from experts on preparing for a downturn still applies: If possible, set aside emergency funds to weather an unforeseen event or job loss.
https://www.cnbc.com/2023/09/05/recession-indicator-may-be-broken-odometer-for-economy-says-expert.html Recession indicator could be a ‘broken odometer’ for the economy, says expert
