Recession Indicator Flashing Red

BY Brian Loftus
8/20/2019 - HVAC Market Intelligence

One of the more popular items in the DDN last year was Recession Indicator Warning from the August edition.  We explained what an “inverted yield curve” was and why members should watch this indicator.  The item closed with the following:

The time from inversion to recession has ranged from nine months to almost two years. The transition or impact will not be consistent across HARDI member regions or states. One objective of our HARDInomics initiative is to identify and monitor state-level economic indicators. One of your objectives is to watch the business headlines for news that the yield curve has inverted, signaling the next economic downturn is approaching.

We have included “inversion tracking” in HARDInomics to help you monitor this guidepost.  Many investors and analysts have already started their recession clocks because earlier this year some government debt that is less than two years to maturity have been providing yields greater than the ten year.  The three month, six month and one year yields are much higher than the 10 year bond yield!  We started our recession clock yesterday when the two year yield exceeded the ten year. 

Click here to see the range of rates available from US Government bonds.  In the center of the page is a “get updates” option if you would like the US Treasury to send you an e-mail every day with access to this page.

Click here to see a brief animation by the Wall Street Journal that is an elementary explanation of bonds, the yield curve, why the current shape is so unusual, and why the inverted curve is a valid indicator.  In this case it is just another dot to connect for a clearer picture of the weak economic outlook.

The PMI has been down four consecutive months and that is a solid indicator of industrial production – Alan Beaulieu’s favorite economic barometer.  While that is singing the faint sound of slowdown, a Heavy Metal version was the Federal Reserve Bank trimming the fed funds rate “as insurance” against a slowdown.  One of the great economic hurdles is the high degree of uncertainty associated with level of demand from our international trading partners with their own struggling economies, and the tariff threats are and additional level of uncertainty that clouds the outlook, makes planning more difficult and hurts demand.  The election could be another level of uncertainty for some business leaders.  Lower rates will not solve uncertainty.

One thing that is certain is that the slowdown will not effect each state the same. If you are wondering how this may effect your specific state, the January, April, July and October quarterly HARDInomics reports have state level analysis along with the regional reports.  The monthly HARDInomics, next edition available Tuesday August 20, is more macro oriented, like tracking the yield curve. If you're interested in more information, contact Brian Loftus.