Wall Street's oldest recession indicator is signaling again

Analysts and strategists on Wall Street often use so-called "recession indicators" in their work, that is, simple statistics that serve as evidence of an impending economic disaster, and therefore are very important for risk management, writes Yahoo.

If you look at the yield curve, since 1969, every US recession has been preceded by an inversion (that is, an inverted state) of this line. On a chart, this line shows the relationship between 10-year and 2-year US Treasury yields. Typically, short-term bonds have lower yields than long-term bonds because investors take on more risk by lending their money over a longer period. This trend is an upward curve on the chart, and sometimes it can be inverted or inverted. This happens when long-term bond yields fall below short-term bond yields.

But investors should not rely on this historical recession indicator alone.

After a yield curve inversion, it usually takes about 15 months for an economy to officially enter a recession, market veterans explain. If you look at current conditions and conditionally count this period - 15 months - about a year ago, then the US economy may enter a recession as early as October this year.

Thus, strategists at Verdence point to the current yield curve inversion and other economic signals, predicting the inevitability of a recession in the second half of this year.

The last 6 of all inversions correctly predicted an economic downturn, except for a brief inversion last March. Inversion, in practice, is a sign that investors are shifting money from short-term bonds to long-term bonds, expecting that a short-term slowdown in business activity will force the central bank to cut interest rates. So it was on July 5, 2022: the Treasury yield curve (the difference between 10-year and 2-year Treasury yields) flipped and has remained that way ever since.

The leading economic index (LEI) of the Conference Board, which uses data such as building permits issued in the country, average working hours per week, and new orders from manufacturers, also testifies to investor pessimism. This index fell to its lowest level since July 2020 in May of this year and has been falling for 14 consecutive months.