Rule No. 1 of analyzing the economy π
The professor who made the inverted yield curve famous nails it π―
Donβt count on the signal of a single metric.
Thatβs rule No. 1 of analyzing the economy using data.
Economic forecasters over-indexing to metrics like the yield curve and the Conference Boardβs Leading Economic Index have learned this lesson the hard way: These once reliable predictors of recessions have failed to do so in recent years.
I bring this up today because The Wall Street Journal just published a big feature on the yield curve titled, βWall Streetβs Favorite Recession Indicator Is in a Slump of Its Own.β The title speaks for itself.
In a nutshell, this indicator has been based on the notion that the economy is functioning normally when long-term interest rates are higher than short-term interest rates, a phenomenon thatβs also referred to as an upward-sloping yield curve. When the yield curve inverts (i.e., when long-term interest rates are lower than short-term interest rates), the economy is thought to be malfunctioning. Historically, yield curve inversions have a pretty good track record of preceding recessions.

But nothing is ever certain.
And in the current economic cycle, the yield curve β which has been inverted for two years β has been predicting a recession that hasnβt come and doesnβt seem to be coming anytime soon.
The other metrics may tell a different story π
My favorite part of the Journalβs feature was this quote from Duke University finance professor Campbell Harvey, who popularized the link between inverted yield curves and recessions:
βIt is naive to think that you can just forecast the complex U.S. economy with a single measure from the bond market.β
Harvey nails it.
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