• Sun. Oct 1st, 2023

News Eyeo

All Important News

Expert suggests that the recession indicator could function as a ‘faulty odometer’ for the economy


Sep 5, 2023

A recent survey of economists has revealed a divided opinion on whether an inverted yield curve, which is often seen as a predictor of a recession, actually indicates a downturn. Many Wall Street firms have reduced their predictions of a recession, leading to questioning the validity of the yield curve inversion as a reliable indicator. While the yield curve has accurately predicted past recessions, it has been less reliable in recent times. The National Association for Business Economics found that more than two-thirds of economists surveyed were confident that the Federal Reserve could help the economy achieve a soft landing. However, 20% of respondents believe that the US is either currently in a recession or will enter one this year.

Major Wall Street firms, including Goldman Sachs, Bank of America, and JPMorgan, have also scaled back their recession predictions. The strong job market has prevented the US from already entering a recession, according to the NABE survey. The survey also showed that economists are divided on the implications of the yield curve inversion for the US economy. The yield curve shows the relationship between yields on fixed-income securities and their maturity length. A normal yield curve slopes upward, indicating higher yields on longer-term treasuries. However, when short-term economic prospects are worse than long-term ones, it prompts higher yields on short-term treasuries, resulting in a downward-sloping yield curve or an inverted curve.

This inversion is often seen as a predictor of a recession. The recent survey revealed that economists have differing opinions on what a yield curve inversion means for the US economy. The most popular belief, held by 38% of respondents, is that it indicates declining inflation without a recession. Meanwhile, 36% believe it predicts a recession in the next 12 to 18 months, and 14% see it as a sign of low long-term bond premiums with no recession. While yield curve inversions have historically been reliable indicators of recessions, this was not necessarily the case in 2019 when the yield curve inverted without predicting the 2020 recession caused by the global pandemic.

Economists acknowledge that current recession predictions are based on past patterns, and it remains uncertain whether the yield curve inversion will accurately indicate a downturn in the US economy this time. Experts advise individuals to prepare for a potential downturn by setting aside emergency cash to weather unforeseen events or job loss, regardless of whether a recession occurs.

By Editor

Leave a Reply