The economy has been strong for several years now. Unemployment has been at a 50-year low, wages have been rising, and GDP growth has been significantly higher than during the Obama years.
However, some warning signs are pointing to the possibility of a recession within the next two years.
A team of Bank of America Merrill Lynch economists has said that three of the top five economic indicators of the business cycle are near levels associated with the beginning of previous recessions.
The best predictor of recessions has been the inversion of the yield curve between 2-year and 10-year treasury bonds.
That is exactly what happened on Tuesday.
CNBC reported that “the last inversion of this part of the yield curve was in December 2005, two years before the financial crisis and subsequent recession. Economists often give the spread between the 10-year and the 2-year special attention because inversions of that part of the curve have preceded every recession over the past 50 years…
In practice, that means that investors are better compensated for loaning to the U.S. over two years than they are for loaning for 10 years.”
As of this writing, the stock market is way down. The Dow Jones Industrial is down over 600 points, and the Nasdaq is down over 200 points.
However, it should be noted that an inverted yield curve is often a lagging indicator, and typically recessions don’t occur for 22 months.
The inverted yield curve is not foolproof. After World War II, seven out of nine times a recession followed an inverted curve, but there were still several times when no recession occurred.
Are We In Danger?
There is also some skepticism on the part of some economists that the inverted yield curve is still a danger signal for the economy.
Former Federal Reserve Chairwoman, Janet Yellen, expressed skepticism, saying, “Historically, it has been a pretty good signal of recession, and I think that’s when markets pay attention to it, but I would really urge that on this occasion it may be a less good signal. The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.”
Yellen was then asked if she thought the United States was headed into a recession, and she said “I think the answer is most likely no. I think the U.S. economy has enough strength to avoid that, but the odds have clearly risen and their higher than I’m frankly comfortable with.”
It isn’t necessary all doom and gloom for the economy. There are still more jobs available than there are workers to fill them; the United States has become energy independent, and the economy is still growing.
Contrary to media reports, tax revenue into the United States Treasury has increased due in large part to an increase in collections from payroll taxes, which is a sign of job growth.
One must remain skeptical when listening to media reports because they want to hurt Trump’s chances at reelection by dampening consumer and producer sentiment.
Business cycles ebb and flow and we have been fortunate that it has been over ten years since the last recession.
Hopefully, another one isn’t on the way.