Could the US economy be about to fall into recession?
Going off some recent commentary, it is, with many pointing to a flattening of the US yield curve as a sign that a recession maybe looming.
As seen in the chart below from RBC Capital Markets, the difference between one and 10-year US bond yields has recently fallen below 100 basis points — and is continuing to decline — as the US Fed continues to lift interest rates.
Should the recent trend continue, it suggests the US yield curve could turn negative, a scenario that has often heralded the start of recessions in the past.
To many, as was the case in the past, this is an early and somewhat ominous warning signal that the near-decade long recovery from the great recession could be about to end.
But just because the yield curve is flattening, does it mean that the US recovery is almost over, especially as the current expansion is now one of the longest on record?
To Tom Porcelli, Chief US Economist at RBC Capital Markets, while history makes a compelling case that recession risks are building, the flattening of the yield curve — and potential inversion — provides little evidence as to when the next recession will arrive.
“The timing between an inversion and recession can vary significantly,” he says.
In the mid-1960s it took more than four years between the inversion of the 1s/10s curve and the start of recession. It took as little as nine months in the mid-1950s and early 70s.”
Not only that, he also notes that the current curve is still positive, adding to uncertainty as to the timing when it may turn negative given widely differing timeframes in the past.
“From an already flat curve to inversion, the results are similarly wide-ranging,” he says.
“Ahead of the last downturn it took a mere nine months for the curve to go from 100bps to inverted, but then an additional 24 months before the recession started.”
Porcelli says that from a historical perspective, the average amount of time it took the curve to go from flat to inverted was 18 months and the average time to go from inverted to recession was 18 months.
“In other words, on average it takes three years to go from a flat curve to recession,” he says.
“So even if we take the inverted curve as gospel, it suggests the expansion still has multiple years in it.”