June 2024 Recession Watch

After every recession, economists and market strategists review their processes and analyses to identify economic signals that could have predicted the downturn.

The Yield Curve Inversion: In 1986, Dr. Campbell Harvey, a finance professor at Duke University, identified the inversion between the 10-year Treasury Bond and the three-month T-Bill as a recession predictor in his dissertation. His model has since accurately forecast eight recessions without any false signals. On average, the yield curve has been inverted for about 12 to 18 months before the onset of a recession. The current inversion, which began on October 25, 2022, has persisted for over nineteen months, marking the most extended period of inversion without a recession.

The Piper-Sandler Recession Indicator: Developed by Michael Kantrowitz, the chief market strategist at Piper-Sandler, a renowned investment bank, and asset management firm, this indicator is triggered when the average yearly growth rate of U.S. unemployment over three months rises by 10% compared to the previous year. This indicator was triggered in April, though it is important to note that no indicator is infallible.

 The Sahm Rule Recession Indicator: Created by economist Claudia Sahm, this coincident indicator indicates that the economy is in recession often before the NBER (National Bureau of Economic Research) declares a recession has begun. It is triggered when the three-month moving average of the U.S. unemployment rate rises by 0.5% above its low in the previous 12 months. This indicator has been increasing but has not yet indicated that we are in a recession. 

Conclusion: Indicators suggest that parts of the economy are slowing, and the labor market is weakening. Most new jobs have recently been created in the government and healthcare sectors, which typically do not drive significant economic expansion. The inverted yield curve reflects the market’s anticipation of weaker economic growth in the future. The level of deficit spending by the government has delayed an economic slowdown. For context, the current deficit as a percentage of GDP has only been surpassed during WWII, the Global Financial Crisis, and the COVID-19 Pandemic. The current level of deficit spending is what you would expect as a temporary measure to bring the nation out of a downturn, not to stave one off. If deficit spending is reduced and the economy is allowed to stand on its own, elevated interest rates would slow the economy, bring inflation down, raise the unemployment rate, and the economy would likely correct into a recession. That is the natural course of a business cycle. We’ll need to closely watch the data as it develops to understand the economic trajectory ahead better.