Wall Street’s favorite recession signal began flashing red in 2022 and has remained active, despite being consistently inaccurate thus far. The yield on the 10-year Treasury note has been lower than most shorter-dated counterparts since then, resulting in an inverted yield curve, a pattern that has historically preceded nearly every recession since the 1950s.
Although the conventional belief suggests that a recession should follow within a year or two of an inverted curve, no recession has materialized, and U.S. economic growth remains strong. This anomaly has left many on Wall Street puzzled about why the inverted curve, typically a reliable indicator of economic downturns, has failed this time and whether it signifies ongoing economic risks.
Mark Zandi, chief economist at Moody’s Analytics, humorously remarked that the inverted curve has been misleading so far but cautioned against dismissing its continued inversion as a sign of potential economic peril. Despite the inversion persisting since July 2022 or October of the same year, depending on the reference point, a recession should have occurred by now based on historical patterns.
Various economists and analysts have expressed skepticism about the reliability of the yield curve as an indicator, given its prolonged inaccuracy. Other economic indicators, such as GDP growth, the Sahm Rule, money supply trends, and leading economic indicators, also suggest caution about the sustainability of the post-Covid recovery.
While concerns about a looming recession persist, the economy has not shown definitive signs of contraction. Factors such as the Federal Reserve’s unconventional rate policies and companies locking in low long-term rates before rate hikes have contributed to the divergence between economic indicators and actual outcomes.
The potential impact of upcoming debt rollovers for companies, coupled with the Fed’s rate decisions, adds complexity to the economic landscape. The inverted yield curve, which has defied expectations so far, may yet reflect underlying economic risks if prevailing conditions change. The uncertainty surrounding economic indicators underscores the need for cautious monitoring and policy adjustments to navigate potential challenges ahead.
