The Inverted Yield Curve: Harbinger of Recession?

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The Inverted Yield Curve: Harbinger of Recession?

May. 07, 2019

An inversion of the U.S. yield curve historically precedes a U.S. recession with an average lead time of about 14 months. According to our yield curve-based model, there is a 34% probability of a recession in the next 12 months.

The Index of Leading Economic Indicators indicates that the U.S. economy is slowing, not contracting. The latter, not the former, is what historically tends to precede a recession. The spread between year-over-year nominal GDP growth and the federal funds rate suggests that current policy is still accommodative in our view. Solid corporate profit growth and a record low unemployment rate underpin a positive fundamental view.

We believe that a recession is not imminent, but that caution is likely warranted as some indicators are now flashing warning signs.