Are fears of a coming recession justified?
With Alex Surmacz
The business pages are currently dominated by fears of a looming recession. Are these concerns grounded? Or, are the warnings of so many market experts simply baseless attempts to pile criticism on Trump?
A variety of metrics are used to predict recession. One of the most common is the yield curve on U.S. Treasury bonds.
A bond’s “yield” is simply the interest rate the government promises to pay on its debt. The “yield curve” cited in many recent headlines is typically the difference between the rates on long-term (e.g. 10-year) loans and short-term (2-year) loans.
The U.S. government usually promises higher yields on long-term debt. This is because the lender forgoes other opportunities to grow wealth and because there is potentially a higher risk associated with long-term repayment. By contrast, yields are typically lower on short-term debt instruments.
How does this relate to a recession?
Observers generally get nervous when they see something called a “yield curve inversion.” Inversion means that short-term yields are larger than long-term. This is often interpreted as a sign of low confidence, sometimes brought on by a slowdown in growth.
Thirty YEars of YieldS, Four Inversions
The yield curve has only inverted three times in the past 30 years. A recession followed each time. This includes 2001 and the Great Recession spanning 2007-2009.
That’s partly why folks are worried now. The curve inverted in 2019 – albeit briefly. According to this single metric, the U.S. is on the verge of a recession.
Inversions beget recessions?
Of course, the yield curve is only one measure. And the inversion in 2019 was modest and short-lived. However, it’s understandable that it makes people nervous. Escalating trade tensions and greater uncertainty on Wall Street have many commentators fearing the worst.