There’s an interesting post at the American Institute of Economic Research in which Richard Salsman argues that the yield curve is a reliable predictor of recessions in the United States. The “yield curve” is the relationship between maturities and interest rates. Here’s his thesis:
Over the past half century in the U.S., yield-curve inversions have been important because they’ve reliably predicted all seven U.S. recessions, beginning roughly a year in advance (see table). Those recessions, of course, have been closely associated with bear markets in stocks and bull markets in bonds. It matters a lot – or it should, for those who care about portfolios.
The yield curve’s forecasting record since 1968 has been perfect: not only has each inversion been followed by a recession, but no recession has occurred in the absence of a prior yield-curve inversion. There’s even a strong correlation between the initial duration and depth of the curve inversion and the subsequent length and depth of the recession.
Lags (the duration between the inversion of the yield curve and the beginning of the recession) have varied between weeks and years which to my mind throws a bit of cold water on the hypothesis. It also makes me wonder to what degree the yield curve is actually a measurement of the financialization of the economy. The post has lots of interesting graphs.
The yield curve inverted in May.
Maybe it causes recession through non causal expectations.
Any theory that imprecise (years lag) is suspect since intervening events can occur. In any event it is clearly not a useful predictive tool given that imprecision.
Yield curve inversions, especially 2-10 year inversions, are very good at predicting recessions.
Look at this graph between when 2-10 year inversions and recessions since 1980.
https://fred.stlouisfed.org/series/T10Y2Y
At a glance that graph is a strong relationship.
The only caveat is in previous recessions, the inversion lasted >= 6 months. The inversion this year was 1 week in August.
The big difference between the current economic expansion in the US and past ones over the last few decades is that it is driven by manufacturing instead of finance, i.e. actual products rather than paper and 0’s and 1’s. That is why every stock market hiccup that makes the chickens scream the sky is falling is ignored by the rest of the economy. The economists need to crunch the statistics from the 50’s and 60’s.
That would be interesting but I don’t think the numbers add up. See here.
Manufacturing at $2.17 trillion is about 12.5% of the economy (total GDP=$20.49 trillion). Since July 2016 it has increased by about $200 billion or 1% over two years.
That is not to say that manufacturing is not an important part of the economy’s growth. It is. But services provide almost $13 trillion of the economy and increased by $900 billion over the same period.