On Wednesday, a closely monitored spot on the yield curve inverted, signalling a warning to Wall Street that an economic downturn could strike. This was the first time since 2007 this has happened, with the benchmark 10-year Treasury bond yield breaking below the 1.632 percent yield of the two-year bond. An inverted yield curve is seen as an indicator of recession, as it implies investors believe the economy is soon to slow significantly or contract. Express.co.uk brings you the four warning signs the USA may be on the brink of recession.
Yield curve inversion
There have been five inversions of the two-year and 10-year yields since 1978.
All five of these were precursors to a recession but, according to data from Credit Suisse, there is an extended period of time before this happens.
The data shows on average, a recession did not occur until 22 months after the inversion.
The S&P 500 experienced average returns of 15 percent 18 months following an inversion before it finally turned.
Tom Essaye, founder of The Sevens Report, said on Wednesday: “Historically speaking the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere from six-to-18 months from today which will drastically, and negatively, shift our medium-to-longer term outlook on the broader markets.”
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GDP
Two consecutive quarters of negative economic growth trigger a recession – and Germany is halfway thereafter a 0.1 percent loss in the second quarter of 2019.
The USA makes up around a quarter of global GDP and last quarter, US GDP slowed to 2.1 percent – down from 3.1 percent in the first quarter.
This is still positive but is well below the growth of 2.9 percent in 2018.
Contributing to the slow down is the US trade war with China, which is a cause of concern for economists.
This month Goldman Sachs chief economist Jan Hatzius warned: “Fears that the trade war will trigger a recession are growing.”
In China, industrial output plummeted to a more than 17-year low in July.
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Stock Markets
On Wednesday, Dow Jones lost 800 points – three percent – in its worst performance this year.
Economic uncertainty globally is impacting the markets, with the US-China trade war, Germany’s GDP loss and Brexit contributing to investor worries.
Arthur Cashin, director of floor operations for UBS Financial Services at the New York Stock Exchange said: “The periods of boredom have grown shorter and shorter – and the terrors last a bit longer.”
Markets are not concrete at predicting a recession, however, they dropped before the 2001 recession and at the beginning of the 2008 recession.
Ben Carlson, a portfolio manager at Ritholtz Wealth Management said most recessions are not preceded by stock market falls.
He said: “We’ll have a recession at some point but odds are the stock market won’t tip us off ahead of time.”
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Manufacturing
Despite the US manufacturer sector expanding in July, according to the Institute for Supply Management, the pace of growth slowed to the weakest in almost three years.
The reading dropped to 51.2, the lowest index since August 2016 in the wake of the continuing trade war.
Readings below 50 mean the industry is declining, and readings above indicate growth.
Speaking on National Public Radio (NPR) on Thursday, NPR’s chief economics correspondent Scott Horsley said: “The trade war does two things that are not good for the manufacturing sector.
“One is it disrupts supply chains and increases costs.
“The other reason that the trade war is bad for the manufacturing sector is it’s had a chilling effect on global growth.
“US manufacturers who export things to other places are feeling some trade winds as well.”