Economists have been watching the yield curve closely for several months, pointing to its inversion as a clear sign of a recession, but now many of them believe that the curve’s inversion might be a false alarm, reports an article in Forbes, especially with the jobs market and consumer spending are still solidly holding up.
Every one of the last eight recessions have been heralded by yield curve inversions, which is when long-term Treasury yields drop lower than short-term returns. The yield curve began to invert last June and amid persistent inflation and recession fears, it’s now deepened to its worst inversion since the 1980s. That would seem to indicate that a recession is “almost a certainty,” Lawrence Gillum of LPL Financial told Forbes. But even he concedes that the current curve inversion is giving off mixed signals, with the Fed’s aggressive rate hikes and the anticipation that inflation will begin easing making things murky. Likewise, the labor market has remained healthy and consumer spending is still high—two things that make this yield curve inversion stand out from previous ones. Indeed, in 1967 an inversion ushered in a slowdown in manufacturing and a credit squeeze, but not a recession.
Gillum’s doubt that the inversion is an absolute sign of a recession was backed up by Campbell Harvey, an economist at Duke University who spearheaded yield curve research in 1986. In an interview with CNBC, Harvey called the Fed “a real wild card,” pointing to how higher interest rates may help slow down the economy but whether or not they ease up on monetary policies in time to avoid a recession remains to be seen. And while many top Wall Street firms such as Bank of America and Deutsche Bank still believe that there will be a shallow recession in the U.S. this year, many economists have turned more optimistic recently, with JPMorgan CEO Jamie Dimon telling Fox Business that the U.S. could still avoid a recession since corporate America and consumers are “still strong…and in good shape,” according to the article.
The general delay between when a yield curve first inverts to the start of a recession varies from 6 months to 2 years, looking at the last 60 years. And while “[e]conomic models help simplify a complex world…it’s important to remember that the signal isn’t always accurate and something things are, in fact, different,” Gillum told Forbes.
———————————————
Validea runs stock and ETF models based on investment strategies with proven long-term track records. If you’re new to Validea, consider taking a look at our product overview or introductory videos.
