The man behind the market's favorite recession indicator says his model still works, even as it says everything is fine in the middle of a global economic meltdown
The market's most famous recession signal no longer points to a recession, but Campbell Harvey, who invented the model says this is because it is predicting a recovery after the recession The yield curve is no longer inverted with the 3-month US trading at 0.14%, below all of the longer-term US bonds
US weekly job claims hit 5.2 million Thursday, taking the total unemployment claims in the last four weeks to over 22 million, and erasing more than a decade of jobs created.
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Yield curve inversion is probably the market's best-known and favorite recession indicator, but amid a pandemic triggered global economic meltdown, the US treasury curve is looking decidedly normal. That shouldn't stop people trusting the efficacy of the indicator, which has successfully predicted the past eight recessions in the US, the Duke University professor who pioneered the model told Business Insider. A yield curve is a set of points which show how much yield investors get for bonds that expire at different points in time. Normally, the longer the duration of a bond, the more yield it provides, reflecting the risk of holding something for the longer term. However, during times of financial panic, the opposite happens, and longer-term debt becomes cheaper than short term debt. That reflects the fact that investors see things returning to normal in the longer-term, while in the short term markets will be choppy. Right now, the yield curve looks normal, even as a bitter recession looms large around the world. So has the model broken down? Campbell Harvey — the professor at the Duke University's Fuqua School of Business who created the model — defended his model and told Business Insider that even though the yield curve is currently upward sloping the inverted curve model still works. Why the model still matters
According to Harvey, the yield curve is upward sloping because recessions are typically short in duration and a recovery follows. "The yield curve inverted in 2019 forecasting a recession in 2020. The yield curve is now upward sloping. It is not unusual for the yield curve to be upward sloping during a recession because it is forecasting a recovery." The signal flashed red in mid-August 2019 for the first time since the global financial crisis when two-year treasury notes became more expensive than bonds with a maturity of ten years. In February this year, the difference between the 3-month and the 10-year US treasury bond fell to its lowest point since October 2019. Asked whether the economy faces the prospects of a recession only because of the coronavirus pandemic, meaning the model may have made an inaccurate prediction otherwise, Harvey said: "We will never know if a recession would have happened without the pandemic, that is called a counterfactual." He added: "Obviously the model did not forecast a pandemic, nevertheless, the track record of the model is intact at eight from eight with no false signals." China's economy shrank by 6.8% in the first three quarters of 2020, signalling a bitter economic downturn for the country who was best shaped to survive the fallout. Meanwhile, the global economy is bracing for its worst recession since the Great Depression as the virus has brought every major economy to a standstill and outbreak continues to hamper economic activity, the International Monetary warned this week. An inverted yield curve has predicted every recession since the Second World War. The inverted yield curve has posted a false signal only twice before according to JPMorgan Asset Management. The first was in 1965 and the other in 1998. Coronavirus, which causes an infection called COVID-19- has caused at least 161,000 deaths and infected more than 2.3 million people. But not everyone is convinced the inverted yield curve should alarm investors and be interpreted as a definite indicator of a recession going forward. Christopher Schon, Qontigo, executive director of replied research at Qontigo said: "It would not be entirely fair to claim that the inverted yield curve we saw in August 2019 predicted this recession. The reality is, the coronavirus crisis has upended all previous predictions." Schon added that an issue with validating the inverted yield curve as an effective predictor of economic growth is that there is often a considerable time lag before the markers of a downturn emerge. "[We] found that share prices can continue to rise for another year after long-term yields fall below short-term interest rates. It can then take a further six months before the recession sets in," he said.Join the conversation about this story » NOW WATCH: Why Pikes Peak is the most dangerous racetrack in America
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Why double-dip recessions are especially difficult, and what they mean for the general state of the economy
Summary List Placement Each time a recession looms, financial folk start fretting: Could it become a...Summary List Placement Each time a recession looms, financial folk start fretting: Could it become a dreaded double-dip recession? While these types of economic downturns are rare — in fact, the US has experienced only one before — they're always a possibility. Double-dip recessions are especially painful for both consumers and investors. They prolong the road to recovery, causing employment, wages, and investment opportunities to stagnate even longer than they normally would. What is a double-dip recession? A recession is a significant downturn spread across the economy that lasts more than a few quarters. A double-dip recession, as the name suggests, is a sort of dual-edged decline, in which the economy falls into a recession twice with a brief recovery period in between. It's not an official designation used by the National Bureau of Economic Research (NBER), the private nonprofit that tracks business cycles and the start and end dates of US recessions. Still, the term is something economists and the financial media often use to describe or predict a country's economic course. They also commonly refer to a double-dip recession as a W-shaped recovery, in reference to its shape on an economic cycle chart. These charts usually depict a center horizontal line at zero that represents average gross domestic product (GDP) growth in the long run. Points above the central line (positive) then indicate higher than average economic growth while points below the line (negative) indicate slower than average economic growth or economic decline. When plotted, a double-dip recession forms a pattern of down-up-down-up that resembles the letter "W." What causes a double-dip recession? There are varied reasons why the economy might dip twice. In all cases, something occurs to interrupt the economy's recovery from the first recession. This might be a separate crisis that repeats itself — such as a global pandemic that produces wave after wave of outbreaks. Another cause of a W-shaped recovery: if governments and central banks raise taxes or interest rates, usually to reduce a growing deficit or control inflation. While these fiscal and monetary policies aim to promote long-run economic stability, they can also cause the economy to falter a second time in the short run. Ironically, the widespread belief that another recession will occur can also cause a second dip, as consumers become hesitant to spend, investors hesitant to invest, and businesses hesitant to expand. Double-dip recession vs. other recession shapes A double-dip recessions resemble a "W" in charting, and it's not the only shape used to describe recessions. Recessions actually come in an entire alphabet soup of shapes. Others include: V-shaped recovery, in which the economy bounces back as quickly as it declined, is the best-case scenario because it involves the shortest recession period. U-shaped recovery is slightly less ideal, because the economy drags on at the trough longer, which means a slower recovery. L-shaped recovery — picture an L tilted 45 degrees counter-clockwise — is the worst-case scenario. This severe recession, or depression, entails a long and deep period of ongoing decline with the economy failing to return back to "normal" for years, if ever. A double-dip recession is on par with a U-shaped recovery in terms of desirability. Though not the absolute worst, both result in a slower recovery period. Some economists warn that the second dive, along with shattering confidence, can also cause massive inflation and a dramatic decline in the value of a country's currency. When was the last double-dip recession? The first (and last — so far) double-dip recession in the US came in the early 1980s. It began, in part, due to a spike in oil prices after the Iranian Revolution. Beginning in January 1980, the first dip lasted only six months, though. By July 1980, the economy entered a period of growth. However, it tumbled again in July 1981, due in part to the Federal Reserve raising interest rates to counter inflation. This second, more severe recession lasted 16 months, ending in November 1982. The Fed knew that by raising interest rates, it could stifle the economic recovery. Unfortunately, prices had been rising for the better part of the last decade, and forcing the economy into another recession seemed the only way to get inflation under control. It did work, however. And once the price drop happened, the Federal Reserve lowered interest rates again, and the economy achieved an impressive recovery. The financial takeaway A double-dip recession threatens to turn what would have been a quick recovery into a painful and potentially lengthy second recession. While not common, the US economy experienced a W-shaped recovery in the early 1980s, and it can happen again. Some economists have posited it as a possibility for the current economic landscape, particularly if spikes in COVID-19 cases force a second round of business closures and lock-downs. The good news is that inflation hasn't been anywhere near the double-digits since the early 1980s and remains low despite the Federal Reserve cutting interest rates to zero. So a repeat of exactly what happened in the 1980s is unlikely. However, that doesn't mean a double-dip recession won't occur for other reasons. Monitoring key economic indicators and paying attention to updates in fiscal and monetary policy can help you guess where the economy might be headed. Keep in mind, though, that economic forecasting is often a guessing game — even for economists themselves. Related Coverage in Investing: Depressions and recessions differ in their severity, duration, and overall impact. Here's what you need to know Business cycles chart the ups and downs of an economy, and understanding them can lead to better financial decisions 2 steps to take to protect your money from a recession, according to a financial expert and bestselling author Virus resurgence in the fall could prompt double-dip recession, Kansas City Fed president says The US economy needs more stimulus to slash the risk of a 'double dip' recession, former Fed official saysJoin the conversation about this story »
The market's favorite recession indicator flashed its starkest warning since October amid the coronavirus outbreak | Markets Insider
On Monday, the curve inversion between 3-month and 10-year US Treasury bond yields fell to its...On Monday, the curve inversion between 3-month and 10-year US Treasury bond yields fell to its most negative point since October amid concern over the coronavirus outbreak. The yield on the 10-year US Treasury fell to 1.3% as prices rallied, below the 3-month US Treasury at 1.5%. "Investors are pretty pessimistic about future US GDP growth and interest rates," Dev Kantesaria of Valley Forge Capital Management said in an interview with Markets Insider. Read more on Business Insider. A popular recession indicator just flashed its most serious warning in months amid worry around the coronavirus outbreak. The yield curve inversion between 3-month and 10-year US Treasury bonds fell on Monday to its most negative point since October. An inverted yield curve has preceeded all US recessions since 1950. A flight to safety amid mounting fears that the coronavirus will slow global growth sent 10-year US Treasury yields plummeting to 1.3% Monday, below the 3-month yield of 1.5%. The 30-year yield also slipped to 1.8%, a historic low. "That's pretty remarkable, as it shows that investors are pretty pessimistic about future US GDP growth and interest rates," Dev Kantesaria, a portfolio manager and founder of Valley Forge Capital Management, said in an interview with Markets Insider. The bond market is now pricing in two interest rate cuts from the Federal Reserve, even though it said it plans to leave rates unchanged this year. As the virus has spread, it's infected nearly 80,000 people and killed more than 2,600 across 30 countries, sparking fears of a global pandemic. If the outbreak continues and does hinder global growth, the US economy could take a hit. On Monday, Goldman Sachs lowered its US GDP growth forecast by 0.2 percentage points amid coronavirus worry. Global stocks tanked Monday as concerns over the virus' spread mounted. The Dow Jones Industrial Average fell more than 1,000 points, and the S&P 500 and the Nasdaq pared losses. If US economic growth is impacted, or the country falls into a recession, long-term interest rates could approach zero, Kantesaria said. "If investors can look past the current market, the low interest rate environment is highly bullish for equity investors," he said. But that might not happen right away, he said. In the near term, "it could get quite scary in the marketplace," Kantesaria said.Join the conversation about this story » NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption
Amid last summer’s recession fever, we identified the key indicators to watch for signs of trouble....Amid last summer’s recession fever, we identified the key indicators to watch for signs of trouble. Five months later, the situation has improved, but risks remain.