Nothing is certain about the markets except the bond yield curve’s excellent ability to predict recessions.
In short, long-term bond yields are generally higher than short-term bonds to compensate investors for faster inflation and greater risk of negative events such as default. But in the rare cases where the long-term return is insufficient in the short term, the so-called. The yield curve is inverted. This is a terrible sign because every recession since the 1950s has been preceded by an inverted yield curve.
When people talk about the yield curve, they usually mean the commonly observed difference between two-year and 10-year yields on US Treasuries. This gap has caused many disruptions as it dropped to 21 basis points from last year’s 158 basis points. Indeed, the economic outlook is somewhat bleak, with rising energy prices, record high food costs, a Federal Reserve campaign to raise interest rates to curb rising inflation, and the growing threat of a military conflict between Russia and NATO.
But a recession? The bond market doesn’t even think about it. Sure, the two- to 10-year part of the curve flattens out dangerously, but orthodox watchers of the curve focus on the difference between quarterly treasury bills and 10-year bond yields. Here, this week the gap reached a whopping 180 basis points, the widest since the beginning of 2017. Research over the years, including a groundbreaking 2018 study by the Federal Reserve Bank of San Francisco, explains why this part of the curve is the most”. A useful term for predicting the recession.
The simple truth is that consumers who spend around two-thirds of the economy may be in the best financial position. Let’s start with the extra savings. Thanks to the very generous social programs that the US government has put in place to support the economy during the Covid-19 pandemic, consumers have created a fairly high monetary buffer. According to the Fed, check deposits for households and nonprofits increased from $ 1.16 trillion at the end of 2019 to $ 4.06 trillion in December. On the other hand, the previous high rate of this metric before the pandemic was $ 1.41 trillion.
But what about Wednesday’s trade report, which showed retail sales growth slowed significantly from 0.3% in February to 4.9% in January? Doesn’t this show that consumers are in balance under the weight of higher inflation rates since the early 1980s? Maybe not. Although this figure was lower than the estimate of an average increase of 0.4%, the January figure was significantly higher than the initial increase of 3.8%. Without this revision, the February increase would have been 1.4%, easily exceeding estimates. As Bloomberg Economics stated, “Retail spending was stronger than expected in February after a successful profit surged in January.
Of course, no one likes to pay more for a gas pump. And it’s a major concern for consumers, as the price of a gallon of regular gasoline jumped from $ 2.39 early last year to an average of $ 4.29, as noted by the American Automobile Association. However, it is a fact that gasoline and energy expenditures fell by about half in the late 1970s and early 1980s as a percentage of one-time income. Many factors cause this, but it can best be summed up as the economy has become much more fuel efficient.
What makes this moment so different from the recent past is the shared wealth. According to the Fed, US household wealth has increased by $ 40.3 trillion since the start of the pandemic to reach a record $ 150.3 trillion by the end of 2021. This is a massive 37% increase in seven quarters and almost equal to the sum of the previous seven years. Unsurprisingly, it’s probably more reassuring that equity is 8 times disposable income and around 4.5 times the recent inflation shock.
There is no doubt that most of the excess savings and household wealth are concentrated in the fund; Inequality of income and wealth has only widened. And it is true that those at the bottom of the income spectrum are the hardest hit by inflation. But even here it can be plated with silver. Government programs that put money directly into the pockets of those who need it most during a pandemic have ended. The idea is that those who can stay out of the workforce thanks to government incentives control may have to turn back as inflation depletes their savings. This may not be a bad thing as it could help sustain this economy by filling the record 11.3 million jobs that companies are trying to fill. In fact, it could already happen.
The Labor Department said earlier this month that the labor force participation rate recorded its largest increase in two months in January and February after mid-2020, when the economy began to reopen after the abrupt. closure. And the overall participation rate of 62.3% is just two months from the current trajectory it had been in the previous years of the pandemic.
Because of all of this, Chris Watling, CEO and chief market strategist of Longview Economics, told Bloomberg Television that he estimates the likelihood of a recession in the near future is between 10% and 15%. “This isn’t my main job,” he told him of the recession. “People have too much cash in their bank accounts. Yes, we’ve had a sharp rise in oil prices, and we have gas prices, and that’s the point, but if you listen to what the CEOs of American banks have to say … people of all income levels. they have a lot more cash. Then the bank took over, and so did the pillow. ”
The yield curve is one of the few curves in financial markets that has achieved legendary status for reversal prior to each of the last eight recessions. Surprisingly, but with great caution, not all yield curve reversals have led to a recession. If the 10-year yield falls below two years again in the next few weeks, it could be one of the times it gives a false signal.
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Source: Washington Post
Jason Jack is an experienced technology journalist and author at The Nation View. With a background in computer science and engineering, he has a deep understanding of the latest technology trends and developments. He writes about a wide range of technology topics, including artificial intelligence, machine learning, software development, and cybersecurity.