An Inverted Yield Curve, is It the Kiss of Death?
An inverted yield curve, high inflation, and a strong economy – this is a combination of factors that has historically been associated with the onset of an economic recession. In 2023, as these indicators continue to emerge, economic experts and analysts are keeping a close watch to see if there is a looming recession in the near future.
An inverted yield curve is a situation where the interest rates on short-term bonds are higher than those on long-term bonds. Since 1950, this has preceded nearly every economic recession in the United States. The inverted yield curve signifies that investors are less optimistic about the long-term future of the economy. In short, this indicates that investors have more confidence in the present than in the future.
High inflation is also a cause for concern in the current economic climate. Recently, the rate of inflation in the US has been at a historically high level. Although some degree of inflation is normal in a healthy economy, high inflation can decrease consumer confidence and purchasing power, and can also lead to higher interest rates, making it more difficult for businesses to obtain loans and make investments. Inflation plays a critical role in determining whether the economy will continue to grow or experience a downturn.
However, a strong economy can offset the impact of the inverted yield curve and high inflation to some extent. The US economy has been growing steadily, with low unemployment rates and high consumer confidence. Robust economic growth can potentially neutralize some of the negative effects of the inverted yield curve and high inflation in the short-term.
Historical data shows that an inverted yield curve, high inflation, and a strong economy often precede an economic recession. For example, in 2006, the United States saw an inverted yield curve, high inflation, and a robust economy, which resulted in the Great Recession the following year. Similarly, in the late 1970s and early 1980s, high inflation and an inverted yield curve led to the severe recession of 1981-1982.
Nevertheless, it is important to keep in mind that the economy is highly unpredictable. The combination of these factors does not necessarily mean that a recession is imminent. For instance, in 1998, the United States had an inverted yield curve, high inflation, and a strong economy, but did not experience a recession.
The bottom line, an inverted yield curve, high inflation, and a strong economy are warning signs that have been linked to a recession in the past. A robust economy can help offset some of the negative impacts of the other factors, but close attention should be paid to these indicators. While historical data offers some insight into what could occur, it is impossible to predict the future with complete certainty, and there is a possibility that the US economy will continue to expand and avoid a recession. Be prepared for any economic environment with a subscription to the Investoristics portfolio management newsletter. Not everyone has the time or interest to manage or build an effective investment portfolio so contact us today, we will be available for you.
