Thursday, December 5, 2019

CNBC explains how the yield curve predicted every recession for the past 50 years

It's time to revisit the yield curve, "the chart that predicts recessions."
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.
Three months ago, Vox did that for me.  Today, it's CNBC's turn with How The Yield Curve Predicted Every Recession For The Past 50 Years.

The yield curve was once just a wonky graph for academics and policymakers. But in recent years it has become a way to forecast looming recessions. The curve has helped predict every recession over the past 50 years. That means the curve accurately predicted even largely unforeseen downturns like the dot-com bubble of 2001 and the Great Recession in 2007.

As a result, news of yield curve inversions can now send markets tumbling. Policymakers keep a close eye on even small changes in the curve’s composition.

So how did this simple graph showing U.S. Treasury bond interest rates grow into one of the most reliable recession indicators we have? And what does a yield curve inversion really mean?
While it's possible that "it's different this time," I doubt it.  I still think the inverted yield curve earlier this year signals an oncoming recession.  However, I no longer have confidence in my prediction of when that will happen.
"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.
The U.S. is not currently in recession and I'm 99% confident that it will not enter one by the end of the year.  The Federal Reserve has managed to forestall it through interest rate cuts before any recession could begin.  Clever of them.  However, that's not going to work forever.  Therefore, I'm kicking my forecast six months down the road with the next recession starting during the first half of 2020 and more likely during the second quarter than the first.  That would mean any annoucement of it starting would be within a month before the election.  Perfect timing.

No comments:

Post a Comment