Ever since I wrote The tax bill and the U.S. economy in 2018 and beyond at the end of 2017, I've been watching the yield curve invert. In all five entries, I noted that an inverted yield curve predicts recessions. However, I didn't explain how and why that works. Vox does in The chart that predicts recessions.
A chart called the "yield curve" has predicted every US recession over the last 50 years. Now it might be predicting another one.Along with the article that inspired the video, that's the best explanation of both how and why the yield curve inverts, using both expectations of economic performance and supply and demand. The only thing missing is how an inverted yield curve works to dry up credit, as there is less incentive for long-term lending. This is how an effect can contribute to the cause, creating something of a self-fulfilling prophesy.
Economic experts are starting to warn that a US recession is becoming more likely because of something called the "yield curve." So what's the yield curve? What does it show? And why is it bad if it "inverts?" We visualized the yield curve over the past four decades, to show why it's so good at predicting recessions, and what it actually means when the curve changes.
Finally, I'm going to repeat what I quoted the last time I wrote about the inverted yield curve.
"I've been bearish and on recession watch since December 2017 and still stand behind the prediction I made in Ten years ago, we were partying like it was 1929. Are we about to do it again?...'I'm moving my recession call to between July and December 2019.'" If that happens, it will be closer to December than July, which is only a month away, but I will not revise my forecast until October at the earliest. I'm even more confident that a recession is coming, even if it takes a bit longer than I expect.