Wall Street's Recession Indicator Has Been Flashing For 16 Months, But A Key Ingredient Is Missing: Analysts

The U.S. economy is currently experiencing a peculiar situation. A crucial recession indicator has been flashing for over a year, yet the other vital component of a downturn is nowhere to be found, DataTrek Research wrote in a note.

What Happened: The spread between the 10-year and three-month treasury yields, a key indicator of an impending recession, has been inverted for 16 months, reported Business Insider.

“Within 9 – 17 months from when the Treasury yield curve ‘inverts’ from its usual condition of long-term rates being higher than short-term rates, the U.S. economy has always experienced a recession,” analysts said in the note.

However, the other half of the equation, a significant shock to the economy, is currently absent. Past downturns have been triggered by unforeseen events such as the 1990 recession caused by Iraq’s invasion of Kuwait, the 2001 dot-com bubble burst, and the 2008 housing bubble collapse.

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Despite the inverted yield curve, the absence of a significant economic shock means that only 50% of the conditions for a recession are currently present.

“We only have half the ingredients necessary to cook up a recession just now,” said the note, “Yes, U.S. monetary policy is restrictive since the Fed wants to cool the economy and reduce inflation. But … The catalyst necessary for a downturn has yet to appear.”

Why It Matters: The U.S. economy’s potential to drive global growth is being questioned, with three critical factors identified by economist Mohamed El Erian that will determine this, including the economy’s ability to sustain its growth momentum, its resilience in the face of domestic political divisions and global uncertainties, and whether investors can secure enough liquidity to refinance debts accumulated during periods of low-interest rates and high liquidity injections by central banks.

Meanwhile, Jamie Dimon, CEO of JPMorgan, has expressed his concerns about the U.S. economy, warning of a potential recession and the market’s underestimation of the risks.

Market veteran Paul Dietrich has also warned that the stock market could experience a significant downturn of up to 30% if a recession occurs.

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