U.S. under Trump Series: Don’t bet too much on a looming U.S. recession

Many reports in the media continue to suggest that a recession is looming in the United States. Today’s article in Reuters suggests

https://www.reuters.com/article/us-usa-economy-poll/us-recession-chances-edge-up-risk-fed-delivers-fewer-hikes-reuters-poll-idUSKCN1NP00E

that large portions of economists are in agreement that recession risks are high. Well, after almost 9-years of continued expansion, almost everyone is worried since economy moves in cycles. One of the major reasons cited by the doomsayers are the continued rate hikes by the U.S. Federal Reserve.

We expect that as the Fed increases rates and reduce monetary stimulus, the volatility in the financial markets move up, which would lead to repositioning in the financial markets, which is likely to lead to selloffs in stocks, while money moves to higher yielding fixed income.

However, these changes do not guarantee a recession, and instead of fearing the looming recession, we would like to urge readers to follow on of the most reliable U.S. recession indicator; the yield spread between short & long-term bonds. Whenever the spread drops below zero, a recession follows in the next 12-24 months.

The last time the spread was below zero for the first time after a rise, was back in December 2005, and it was followed by the Great Recession of 2008/09. Before that, it was the year 2000, which was followed by dot-com bubble burst and recession.

The spread is currently at 27 basis points and unless it declines below zero, we do not see a looming recession. So, don’t bet too much on that as it could be delayed, just like it was in the 1990s.