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he most preferred indicator of the world’s top economists and analysts: the yield curve has shown an inversion in the past few days. The dark clouds start to hover over the economy of the United States and the global financial markets as question looms in every investor’s mine: Are we approaching the moment of a recession? This post attempts to review the different facets of the US economy and whether or not it will add up to the recessionary pressure.
First, let me set the
table by diving into the basics. The yield refers to the returns the investors
will make over the bond on its maturity. The yield curve is a graphical
representation of the bond returns at different points of time; its inversion
is when the yields of long term bond fall below the short term bond yields.
This phenomenon referred to as the yield curve inversion is the harbinger to
evaluate the economic performance of the country. Investors flock to long term
bonds in fear of a recession and push the bond prices upwards, thereby
reflecting the investor sentiment. It has generally preceded all the recessions
since 1950. As per leading investment bank, Credit Suisse, recession generally
occurs post 14-34 months of the yield curve inversion. However, it cannot be
refuted that not all yield curve inversions point towards a possible recession.
The claims of an
impending recession cannot be neglected with overwhelming threat of the effects
of the ongoing trade tussle with China which has pushed the commodity prices upwards
and increased the inability of companies to make the right hiring decisions.
The investor sentiment is very low with the Fed expected to go in for more rate
cuts in order to simulate growth. The
orders for durable goods have declined by 2.1 % from the month of April and housing
market too has suffered serious drop in market rates. The signs for recession
are present. However, it is necessary to look at other economic indicators too.
The US has reported robust GDP growth of 2.1 % in Q2 supported by strong economic
indicators. The Gross Domestic Product is an aggregation of the government
spending, consumption, exports and investment activity. The Government spending
is increasing faster than expected as budget deficit is expected to hit $960
billion mark in 2019. With Trump’s belligerent stand on the amplifying trade
war and increased government spending, United States of America is forced to
borrow excessive sums of money. This ballooning deficit can be contained with
the low jobless rate as per historical trends. However, deficit is expanding
despite record economic expansion and low unemployment rate in past 50 years.
The consumption data is robust with an increase in retail sales and consumer
confidence. Personal income increased
$83.6 billion (0.4 percent) in June according to the Bureau of Economic
Analysis whereas the personal
consumption expenditures (PCE) increased $41.0 billion (0.3
percent). However, with effects of trade war pushing prices upwards, consumer
confidence is expected to develop cracks in the near future. The only force
which can keep recession at bay is an increased consumption rate. Retail sales
rose 0.4% last month supported by spending on motor vehicles, materials and
healthcare. However, future numbers remain dubious given the current
circumstances. On the trade front, as
per the revised estimates of the Census data, the trade deficit in goods and
services decreased to $54.0 billion in July from $55.5 billion in June
indicating a stronger export-driven growth.
Manufacturing sector in
the United States is undergoing serious contractions in both the quarters of
2019. The uncertainties rising from the trade war is raising the costs of doing
business for the corporate. The country’s manufacturing has been hit on multiple
fronts by the Trump administration’s aggressive decisions on the trade
war. As quoted by Fed Chair Jerome
Powell, trade policy uncertainty seems to be playing a role in the global
slowdown and in weak manufacturing and capital spending in the United States. However, despite some serious injuries to the
American economic structure, the idea of recession still can be averted. Going
back in time, in the case of 2008 sub-prime crisis, the loans increased by 8.6%
with only 4.7% corresponding increase in liquid assets. The ratio of liquid
assets against the loans was 23% before the Great Depression. Currently, this
figure stands at 45% in 2019. This is a strong indication of the economy having an arsenal
of shock absorbers to evade the recessionary forces. But at the end, it all boils down to
see how the Federal Reserve will hit the targets with its next monetary policy
meeting in order to curb the rapid slowdown.
* The opinions expressed in the article are personal and do not represent the opinions of the organization I work for *
