US economist has 100% record in predicting recessions. What he says for this year
Recessions in the U.S. have been preceded by an inverted yield curve—when short-term rates exceed longer-term rates—since the late 1960s. Fast forward to 2023, and that’s exactly what’s happening to the yield curve. of the Treasury during the past month and a half. However, Harvey is saying that this time the US economy will manage to avoid a real downturn even though it will continue to slow for a little while longer.
“My yield curve indicator has gone code red and is 8 for 8 in predicting recessions since 1968 — no false alarms,” Harvey, now a professor at the university’s Fuqua School of Business, said in an interview Tuesday. Duke. “I have reason to believe, however, that it is setting off a false alarm.”
The spread between three-month rates and 10-year yields fell to nearly minus one percentage point last month from 234 basis points in May 2022. The spread, on which Harvey’s work is based, has inverted steadily since mid- November and remained on Wednesday at around minus 82 basis points.
Despite the curve inverting for the ninth time since 1968, Harvey said it’s probably not a harbinger of a recession.
One reason is that the yield curve relationship has become so well-known and widely covered in the popular media that it now influences behavior, he said. Awareness prompts companies and consumers to take risk-mitigating actions, such as increasing savings and avoiding large investment projects – which bode well for the economy.
Another boost to the economy is coming from labor markets, where the current excess demand for labor means that laid-off workers are likely to find new positions sooner than usual. In addition, he said, given that the biggest job cuts so far have been in the technology sector, those highly skilled workers recently laid off are also not likely to be unemployed for long.
‘Dodge the bullet’
Harvey’s model was tied to inflation-adjusted yields, and he said the fact that inflation expectations are inverted — meaning traders see price pressures easing over time — also eases the chances of a recession ahead.
“When you put all of that together, it suggests that we can dodge the bullet,” Harvey said. “Avoiding the hard landing – the recession – and realizing slow growth or small negative growth. If a recession comes, it will be mild.”
Even the level of real yields questions the recession signal. US 10-year yields, adjusted for inflation, are likely to be much higher than their three-month counterparts. While there are no three-month rates of return, cross-referencing the last annual CPI reading with the one-year lows would return a negative real rate for the term, compared to 10-year real yields over 1.5%.
Harvey’s view is not the consensus. Many Wall Street firms are calling for a recession sometime this year or as early as 2024 in the wake of the Federal Reserve’s most aggressive campaign in decades to curb inflation.
Former Fed Chairman Alan Greenspan said on Tuesday that a US recession is “the most likely outcome”, a view shared by former New York Fed President William Dudley.
If the US economy manages to avoid recession, for Harvey, it does not mean that his model is now disappointed.
“In science we use models all the time, and they are simplifications of reality,” he said. “And part of the scientist’s skill is knowing when to fit the model and when not to or, in other words, to know the limitations of the model. And I’m probably in a good position to know the limitations, being that’s my role model.”
One characteristic, he said, is whether the Fed after delaying to raise rates last year proves to push them too high.
Fed officials raised interest rates last month by half a percentage point, taking their benchmark to a target range of 4.25% to 4.5%. The quarterly forecasts released also showed rates ending next year at 5.1%, according to their median forecast, with no rate cut before 2024.
Fed policymakers at their meeting last month also reaffirmed their determination to lower inflation, according to minutes of their Dec. 13-14 meeting released Wednesday.
“I believe the time to end coercion is now,” Harvey said.
This story was published by an electronic agency source with no text edits. Only the title has been changed.
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