Are We Heading Toward Recession? The Economic Indicator That’s Rarely Wrong Is Giving Us Warning Signs
Last month, Trump tweeted out that his presidential victory in 2016 ensured that the economy would stay afloat.
“If our opponent had won,” Trump said, referring to Democratic candidate Hillary Clinton, “there would have been a market crash, plain and simple!”
Trump bases that assessment on little to no evidence whatsoever. But now, there are some economic bellwethers to suggest that a downturn is imminent, possibly within his present term of office.
The U.S. Treasury yield curve has been inverted for more than a full quarter, Slate reported on Wednesday. For most, that means absolutely nothing. But for economists, it’s an economic indicator that a recession could be coming.
Treasury securities are bonds issued out by the U.S. government. They include savings bonds, but also other types of investments as well. The 10-year/2-year bond is mostly what has investors worried.
Why are such indicators so important in determining how the market does elsewhere? “Treasury yields are benchmarks for all other interest rates,” according to an explainer from The Street. They are usually considered a safe investment, given that the U.S. government can back them up with federal tax dollars.
An inversion of Treasury bond yields is a near-perfect recession indicator that economists at the Federal Reserve recently called "the best summary measure" for an economic downturn. https://t.co/7T4ezR07i0
— Axios (@axios) June 28, 2019
Okay, so the yield is inverted, which means the bonds aren’t going to put out as much return as expected. How reliable is this in forecasting a recession?
In each of the past seven recessions that have been recognized by the federal government over the past 50 years, each of them was preceded by the Treasury yield curve being inverted for some time — and never did the Treasury yield produce a “false alarm” situation, wherein it came about but a recession didn’t.
It is possible that this could be the exception, that the yield’s downturn isn’t portending more dire economic times to come. But it’s enough to cause some investors and economists to worry.