Does this line predict America’s next recession?

This graph makes a lot of people nervous. Why? It appears to predict that America is about to go into recession. It’s based on an economic indicator called the yield curve.

In fact only on one occasion in the last 70 years has there been a false alarm. And here’s the thing. So what is it about this curve that seems to make it such a good indicator of where the economy is heading?

The line illustrates the return, or yield investors get from investing in government bonds from short-term investments on the left to longer-term ones on the right. Usually the longer the time frame the higher the interest rate as investors demand a bigger return if they’re to lock their money up for longer. However, if investors fear the economy is slowing down then the long-term rates can drop below short-term rates the curve inverts.

When the outlook is gloomy investors are more likely to buy safe assets like long-term bonds, pushing their price up so the interest rate for holding them falls. Higher bond prices are also a signal that there are fewer exciting investment opportunities elsewhere such as the stockmarket. Of course there are plenty of other indicators you could look at to get a sense of what’s happening to the economy.

Then there’s the rate of change in unemployment which correlates closely with recessions. And even monitoring the number of times that newspapers publish the word “recession” can help to anticipate a downturn. But bear in mind that when you’re trying to predict a downturn you’re often trying to get a read on people’s expectations of where the economy is heading which is why that curve is so useful.

But these are extraordinary times for the US economy. Quantitative easing was a policy followed by the Federal Reserve to stimulate the economy after the 2008 financial crisis. The Treasury bought companies’ debt to reduce long-term interest rates. Some experts believe it’s distorted the yield curve.

In other words predicting America’s next recession just got a little harder. But the indicators are starting to flash red.

[Billionswitch]

Given recent price movements, inflation, and the status of the economy, I contend that choosing the ideal asset would be challenging.

[HaZZarD]

Joke's on you America, In Italy we are still in recession 👌

[drt]

Of course. Why not? I mean, I'm this close to finally having my head above shit. So it would be only natural for this to happen.

[ahmedshaharyarejaz]

Yield curve inverts: "Ah Shit here we go again!"

[maryannerachey]

Isn't it always the same, every time you get ahead in life something like this happens.

[farenhite]

Watch everyone sell stocks in panic, then that causes the recession instead of the actual curve.

[kimwelch]

The dying economy and shrinking production indicate a recessive economy and precedes the official declaration of a recession. The yield curve is a late to mid range indicator. By the time you see the curve inversion you're already in trouble because it's caused by investors fleeing to a safe haven.

[Vienna]

Ofcourse it has to happen the year I became an adult

[justinhan]

Economics has significant physiological part. This might be a self-fulfilling prophecy..

[mho...]

neglecting education, healthcare & infrastructure in favor of an inflated military budged & warmongering leads to a recession?! who would have guessed that ?!

[ashthegreat]

I feel we’re heading for a ‘Peter Schiff Was Right’ feature film!

[ASTEVER]

You can run
You can hide
But you can't escape my
😂😂

[robertschlesinger]

Excellent summary of some relevant econometric indicators.

[KoiAquaponics]

Around my industrial street so many warehouses just suddenly became vacant and available in the last 3 months. And this is in southern california.

[rawevidence]

When someone says "this time it's different" - sell everything and run.

[planetcave]

They didn't fix the structural problems that created the last crash, they just allowed a giant debt forgiveness for overinflated real estate assets then proceeded to reinflate again with more corporate and public/private debt. The current valuations in all asset classes and serviceable debt levels are unsustainable.

[stefan-lsyd]

I did not knowingly experience a recession before. Did everyone in 2007/2008 expect a recession?

[iemjay]

It's time to start saving so you can jump head first into the stock market when everyone else is panic selling.. Recessions are the most exciting time to be an investor, so long as you don't end up losing your job, then you won't have anything to invest.

[MartinUToob]

It'd be nice to see a study of Yield Curves - Which ones "matter" - in that they have had predictive power.

Also, an overview - Which Yield Curves have become and are becoming less predictive or have no predictive power.

What's the trend? Which ones are getting better? Worse? No change?

I assume The U.S. Dollar makes the U.S. Yield Curve the strongest predictor because of the U.S. position as the foremost trading currency and role as Guarantor attract capital.

However, I would expect to have realized a weakening trend as the World Economy Globalised with other currencies strengthening, especially the Chinese Yuan and Renembi.

Thank you Economist. You've been one of my most favorite media over the years.

[tobbe]

Maybe we should focus on taking on Wall Street so we can avoid this from happening. Bernie has explained this very well actually.