Economists and market indicators seem increasingly certain that the U.S. is either already in a cyclical downturn, or soon will be.
Driving the news: Perhaps the most-watched market indicator for predicting recessions — a so-called inversion of the yield curve between 3-month and 10-year Treasuries — is now near at hand.
How it works: An inversion is a bit of bond market jargon that describes an unusual situation in which shorter-term Treasury yields rise above yields on Treasuries that mature later.
- In recent days, the yield on 3-month Treasury bills shot sharply higher, while the yield on the T-note has been steady.
- Now, the 10-year is yielding just 0.12 percentage points more than the 3-month bill — perilously close to going negative, aka inverting.
Why it matters: While large parts of the yield curve have been inverted for months, the relationship between 3-month and 10-year Treasuries has a special status.
- Over the last 60-odd years, when this particular part of the Treasury yield curve has inverted, a recession has followed within two years.
- That makes it perhaps the single best market-based indicator of recessions.
- Check out this Q&A from Duke University finance professor Campbell Harvey, the dean of yield curve watchers, for more.
Zoom out: The yield curve isn't alone.
- Since yet another hotter-than-expected inflation report earlier this month, economic forecasters have turned increasingly dour.
- An economic model from Bloomberg now suggests a 100% probability of a recession within 12 months (though a separate Bloomberg survey puts it at 60%).
- A similar Wall Street Journal poll of economists showed the odds at 63% in August, up from 49% in July.
Unemployment remains remarkably low, but traditional rules of thumb say we're already in a recession since we've had two straight quarters of contracting GDP.
- The official call on recessions is made by the NBER, however.
The bottom line: Both the markets and economists seem to think the current downturn, soft patch, or whatever you want to call it, is going to get worse.
