The difference between the 10-year and 3-month Treasury rates known as the Yield Curve has accurately predicted every recession since the 1950’s. It’s telling us now a recession is imminent in 6 to 12 months.
In every instance, save once in the 1960’s, an inverted yield curve in which rates are higher for shorter term treasury’s than for longer 10-year paper has predicted coming recession.
The 3-month tenure officially inverted in October of 2022.
What it means…
The indicator is so reliable that the New York Federal Reserve bank puts the chance of recession occurring at 57%.
“We are at an important point today, because now the yield curve … is getting steeper, and that’s usually when we run into some trouble,” George Cipolloni, portfolio manager at Penn Mutual Asset Management recently told Reuters.
The Yield Curve basically reflects actions taken by banks and financial insiders based on information not always readily available to the public.
Reinforcing insider concerns over the probability of coming hard times is the unemployment indicator known as the Sahm Rule. Economists say the Sahm Rule signals a downturn when the unemployment rate rises 0.5% above its lowest point in the past 12 months.
Historically, the U.S. economy has experienced recession whenever the Sahm Rule has been triggered. Currently, it stands at 0.43%, just 0.07 percentage points short of signaling a recession.
According to Federal Reserve data, the threshold will be met when the unemployment rate increases to 4.2%. Observers are watching this week’s job report carefully, but most expect unemployment to tick down by about 0.1 percent.
Experts expect the Fed will cut the base rate in September. Most watchers are giving the chances for a rate cut at this week’s meeting of the Fed a 0% probability, but they could be surprised if recent indicators of a coming recession gain traction.
Another problem: a rate cut now might well result in a sudden dis-inversion of the yield curve which would signal a near-crisis economic disruption in the near future.
Bottom line. We’re seeing strong warning signs that indicate economic turbulence ahead. It’s uncertain whether it will hit in 4 months or 12 months, but it’s a near certainty recession is coming.
In coming communications, we’ll talk about what people can do to prepare, but whatever comes, a certain amount of liquidity will be critical to your ability to maneuver in the future.