But, as the old saying goes, all good things must come to an end. Recently, some in the financial world panicked when the inverted yield curve, seen by some as an important indicator of the economy’s health, flashed recession for the first time since 2009.
However, these fears are overblown. Although the U.S. economy will likely be unable to maintain its breakneck pace, a recession is not imminent.
First, it is important to understand what an inverted yield curve is. As Roozbeh Hosseini, an assistant macroeconomics professor at the University of Georgia, explains via email that an inverted yield curve occurs when, “On rare occasions, the interest rate on short term assets (like a three month treasury bond) becomes larger than interest rate on long term assets (like 10 year treasury bond).”
In other words, the inverted yield curve predicts that a short-term bond would pay more interest than a long-term bond. This prediction is unusual because long-term bonds generally carry more risk than short-term bonds and thus usually have higher interest rates to make the risk worth taking.
However, Hosseini argues that observers should not overreact to the inversion.
“If you look at most U.S. recessions in the past 60 years, there has been an episode of an inverted yield curve that happens before them,” Hosseini said in the email. “What does it tell us? Nothing really… can we predict a recession in one, three, six months? or one or two years? No.”
Recent data also suggest that the labor market is continuing to do well. The March jobs report from the Bureau of Labor Statistics showed that the U.S. economy added a healthy 196,000 jobs, beating economists’ forecasts of 175,000 new jobs and calming fears after February’s weak job report now appears to be just an outlier. Furthermore, hourly wages increased by 3.2% compared to last year.
In addition, John Williams, the president of the Federal Reserve Bank of New York, iterated his belief on April 3 (before the release of March’s impressive jobs report) that the economy remains strong.
According to Williams, the economic outlook is positive as GDP growth is on track, unemployment remains low and there are no signs of inflationary pressure building.
Williams implies the Federal Reserve members, who look at a plethora of economic data to form monetary policy, understand a slow down will occur, but they do not fear that a recession is coming in the near future.
And Williams is not alone in his confidence, as most members of the Fed do not expect to change rates at all. If the Fed expected a recession to come, then it would lower the interest rate for borrowing to encourage investment and jump-start the economy. That most officials instead think that rates should hold steady indicates that the Fed believes the economy has begun to normalize.
Our economic situation is not perfect, and there are certainly some concerns. Brexit, a global slowdown, and trade wars could all hurt the U.S. economy to some extent. However, currently, there is little evidence to suggest that the U.S. is headed for a recession in the near future.