As Donald Trump continues to claim that in his term, the United States is enjoying “the greatest economy we’ve had in the history of our country,” making that claim “dozens” of times, as the BBC reported, not only do experts say that his claim is debatable, but economists now point to specific economic phenomenon that has appeared just before the last seven U.S. economic recessions. This phenomenon, they say, reveals that the economy is headed into a recession possibly as soon as nine months from now — just as the 2020 presidential election primary season is getting into full swing.
The phenomenon noted by Duke University economist Campbell Harvey in a National Public Radio interview this week is called the “yield curve inversion,” and according to Harvey whose research was the first to link it to recessions, the inversion has correctly predicted the last seven United States economic recessions — going back to the 1960s.
A yield curve inversion occurs when long-term interests rates on U.S. treasury bonds and bank certificates of deposit drop lower than short-term interest rates, according to Investopedia.
“If you lock your money up for five years, you expect to get a higher rate than, say, locking it up for six months,” Harvey said, as quoted by Salon, going on to explain that when that situation flips and the shorter-term rate is higher, “that’s exactly the situation we’ve got now, and it is a harbinger of bad news.”
But for the yield curve inversion to trigger a reliable prediction that a recession is on the way, under Harvey’s model, long-term rates have to stay lower than short-term rates for at least one full quarter — three months. In fact, as of June 30, the “yield curve” had remained inverted for one full quarter, according to Duke Today. Harvey told the publication that under his yield curve inversion model, “there have been no false signals yet.”
According to investment adviser Jesse Colombo, writing on the Real Investment Advice site, the New York Federal Reserve Bank also uses a yield inversion curve prediction model, which now shows a 27 percent chance — better than one in four — that a recession will hit in the next 12 months — about the same probability as it showed just prior to the Great Recession that struck in late 2007.
Since that recession hit 12 years ago, interest rates worldwide have been held at artificially low levels, according to Colombo — a warning that “the coming recession is likely to be far more severe than the majority of economists expect,” due to the multiple “bubbles” created by the low rates.