A Recession Warning Has Gotten Even More Recession-y

The Wall Street Journal suggests that everyone’s favorite recession indicator is probably wrong:

The market’s most-popular recession warning is flashing red again as fears about the economic impact of China’s coronavirus outbreak prompt a big drop in Treasury yields. Yet the warning—a drop in the 10-year Treasury yield below the three-month bill, known as an inverted yield curve—is signaling something much more benign: the expectation of Federal Reserve support later this year.

Well, that’s that. Whenever people finally become indifferent to some particular economic warning, that’s a strong sign that we’re about to get bitten in the ass. Here’s what the yield curve looks like:

When financial reporters talk about inverted yield curves, they always mention the bright side: although inversions do seem to predict recessions, it can take as much as a year before the recession comes. Unfortunately, as you can see, the yield curve actually dropped below zero last summer and has been near zero ever since. If it drops again, it’s probably best to treat the entire period as a single episode, which means we’ll get another recession by mid-2020.

Or not. I mean, the yield curve is sort of a mysterious thing, and it “always” predicts a recession until it doesn’t. On the other hand, there’s a brand of economic analysis that looks at everything in terms of “oh, this thing that looks like bad news is actually good news because it will force the Fed to loosen up monetary policy.” I’m not fond of it. The Journal plays this card today with a subhead that literally says things are “different this time.”

Maybe so! I sure don’t know. But I’ll be resting a little uneasy for the next few months.

HERE ARE THE FACTS:

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ONE MORE QUICK THING:

Our fall fundraising drive is off to a rough start, and we very much need to raise $250,000 in the next couple of weeks. If you value the journalism you get from Mother Jones, please help us do it with a donation today.

As we wrote over the summer, traffic has been down at Mother Jones and a lot of sites with many people thinking news is less important now that Donald Trump is no longer president. But if you're reading this, you're not one of those people, and we're hoping we can rally support from folks like you who really get why our reporting matters right now. And that's how it's always worked: For 45 years now, a relatively small group of readers (compared to everyone we reach) who pitch in from time to time has allowed Mother Jones to do the type of journalism the moment demands and keep it free for everyone else.

Please pitch in with a donation during our fall fundraising drive if you can. We can't afford to come up short, and there's still a long way to go by November 5.

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