- Since 1969, every recession has been preceded by an inverted yield curve.
- The creator of the famous index said it accurately predicted this year's economic downturn.
- When the yield inversion occurred in November 2022, he said it was a false signal.
As Wall Street ramps up calls for a soft landing for 2024, a prominent economic expert who popularized the market's most famous recession indicator says a recession is expected this year.
Campbell Harvey is a Canadian economist and researcher at Duke University whose research has spanned decades to show that an inverted yield curve, a state in which yields on short-term Treasuries exceed yields on long-term Treasuries, precedes recessions in the United States. I showed what I've done.
This indicator, which dates back to 1968, has a predictive power of 8 to 8 and zero false signals. Mr Harvey told host Jack Farley on the Forward Guidance podcast on Thursday that given the yield reversal that occurred in the fall of 2022, a recession could occur in the first or second quarter of this year. He said it suggests that.
He had previously predicted that the indicator could prove wrong this time, given the strength of the labor market and other positive economic indicators. But he upended that outlook.
“This is my model, so there was some credence to what I said, 'My model could be wrong,'” Harvey said. “Essentially, I was saying that it might be possible to avoid a recession, but this depended on whether the Fed would step down. And this was a year ago. The condition was that he step down and not raise interest rates any further. And that's not what happened.”
The Fed raised interest rates 11 times in the 2022-2023 cycle, sending the benchmark interest rate from near 0% to a range of 5.25% to 5.50%.
“As a result, I have slightly revised my opinion,” he continued. “Given the circumstances, I think growth is likely to slow further in 2024.”
He said an inverted yield curve is in some sense a self-fulfilling prophecy because it signals companies and investors that an economic slowdown is coming, which changes spending and corporate behavior and ultimately leads to a decline in activity. He said that.
“There's a causal effect on the yield curve,” Harvey said. “This causal pathway is very different than in the past.”
Additionally, experts point out that a recession is actually coming when the curve inverts and long-term yields rise above short-term bond yields again, so an inversion itself is a sign of a recession. It's not a final decision.
Given its impeccable track record, Mr. Harvey pointed out that this metric is enabling companies to make smarter decisions and operate their businesses more carefully in the current climate. He said that unlike the 2008 global financial crisis, companies are being more strategic and managing risk, so he expects no major layoffs going forward.
“Certainly we could reach a point where indicators lose their predictive power,” he said, “but I don't think we're there yet.”