Recessions usually occur 10-22 months after interest rate curve inverts

The U.S. economy is growing at a fast clip, and the bull market is entering its ninth year. Some economists are starting worry over rising interest rates and a negative signal from the bond market called a flattening yield curve.

The yield curve—with one exception in 1966—has basically predicted every recession according to Natixis Chief Economist Joseph LaVorgna. If the curve inverts on October, 2018 then history would say a recession would occur between August 2019 and August 2020.

“Now it’s possible that this time is different and the curve might be sending a different signal because long rates are relatively low,” LaVorgna added.

In July, the U.S. economic growth rate hit 4.1 percent for the second quarter, its fastest pace in four years. And the stock market has set a record for the longest bull market in U.S. history.

30 thoughts on “Recessions usually occur 10-22 months after interest rate curve inverts”

  1. And the reason why it didn’t occur in 1966 was because of the Kennedy Supply Side Tax cuts enacted (after his death by LBJ).

    Reply
  2. And the reason why it didn’t occur in 1966 was because of the Kennedy Supply Side Tax cuts enacted (after his death by LBJ).

    Reply
  3. The Tax rate for top earners at the time was 90%…so you see how you have been deceived and how you were deceived…right?…They leave that part out..what is Warren Buffett’s tax rate?…15% maybe?

    Reply
  4. The President doesn’t enact a budget, the House of Representatives does. Who are you mad at? Ol Barry had a lot of crap to cleanup after George’s war party (talk about 100 of billions of waste) and general economic implosion. That does take some money to fix. I suppose you could have done so much better.

    Reply
  5. The Tax rate for top earners at the time was 90{22800fc54956079738b58e74e4dcd846757aa319aad70fcf90c97a58f3119a12}…so you see how you have been deceived and how you were deceived…right?…They leave that part out..what is Warren Buffett’s tax rate?…15{22800fc54956079738b58e74e4dcd846757aa319aad70fcf90c97a58f3119a12} maybe?

    Reply
  6. The President doesn’t enact a budget the House of Representatives does. Who are you mad at? Ol Barry had a lot of crap to cleanup after George’s war party (talk about 100 of billions of waste) and general economic implosion. That does take some money to fix. I suppose you could have done so much better.

    Reply
  7. The economy, and the environment it exists in, is constantly changing and, potentially, in such ways that any predictive indicator may eventually become less reliable. This is a way of saying that economists make predictions based upon the past, but when things are happening that have never happened before, their predictions begin running into problems. Although there have been several successes using the inverted interest rate indicator, there have also been several misfires. Keep in mind that part of the reason that short term interest rates might be rising is simply because the Fed is raising rates so as to slow growth so that, in turn, inflation might be slowed. There is some logic in rising short term rates slowing sales and therefore slowing the economy. But what about the long term interest rate? Why is the relationship between it being low while the short term rate is high? This may seem especially strange as the Fed really has little effect on long term rates. That is driven more by the global demand for credit. A weak economy can lower demand for long term credit and, therefore, long term interest rates. So, yes, a drop-off in growth due to an increase in short-term interest rates, coupled with an already weak economy, does seem to create fertile ground for a recession. But the question then becomes one of whether or not long term demand for credit is low because the economy is weak, or simply because, for the time being, firms don’t need or want all the long term credit they can get. Either cause of low demand for long term credit would tend to keep the long term interest rates low. But if it is not due to a weak economy, why would the demand for long term credit be low? Possibly businesses are realizing increased production or lower costs through new technology and techniques, most notably automation. Possibly because they have just received large tax breaks, reducing their need for long term credit, especially if they are using the increased

    Reply
  8. The economy and the environment it exists in is constantly changing and potentially in such ways that any predictive indicator may eventually become less reliable.This is a way of saying that economists make predictions based upon the past but when things are happening that have never happened before their predictions begin running into problems.Although there have been several successes using the inverted interest rate indicator there have also been several misfires. Keep in mind that part of the reason that short term interest rates might be rising is simply because the Fed is raising rates so as to slow growth so that in turn inflation might be slowed. There is some logic in rising short term rates slowing sales and therefore slowing the economy.But what about the long term interest rate? Why is the relationship between it being low while the short term rate is high?This may seem especially strange as the Fed really has little effect on long term rates. That is driven more by the global demand for credit. A weak economy can lower demand for long term credit and therefore long term interest rates. So yes a drop-off in growth due to an increase in short-term interest rates coupled with an already weak economy does seem to create fertile ground for a recession.But the question then becomes one of whether or not long term demand for credit is low because the economy is weak or simply because for the time being firms don’t need or want all the long term credit they can get. Either cause of low demand for long term credit would tend to keep the long term interest rates low. But if it is not due to a weak economy why would the demand for long term credit be low? Possibly businesses are realizing increased production or lower costs through new technology and techniques most notably automation. Possibly because they have just received large tax breaks reducing their need for long term credit especially if they are using the increased inco

    Reply
  9. The President doesn’t enact a budget, the House of Representatives does” And whose budget is sent to the House? The President’s. “In 1921, the Budget and Accounting Act moved many of the preliminary budget-setting functions to the President and the Executive Branch. The act established the Bureau of the Budget (now the Office of Management and Budget) as an Executive Branch agency that works with the President on drafting a budget; it also established the General Accounting Office (now the Government Accounting Office) as an auditor reporting to Congress. Most importantly, the 1921 Act required the President to submit a proposed annual budget for the federal government to Congress, which added to the considerable power allocated to the Executive Branch.” Learn civics or keep looking like a fool on the internet. “Ol Barry had a lot of crap to cleanup after George’s war party” Really? Then why did NOT ONE of Barry’s budgets sent to Congress cut spending? So much for him ‘cleaning up’. He even had the Dems in full budget control of both Houses of Congress in his first two years to pass it. “I suppose you could have done so much better.” Sure I could! I’d have abolished entire federal departments and ALL the entitlement programs before you could scream, “That Warrentheape guy is now making my grandma eat cat food down at the shelter!

    Reply
  10. Yeah, so? Doesn’t have any bearing on what my point was. A tax cut from 91% to 70% is a tax cut. ANY tax cut on work/production is a supply side tax cut. Doesn’t matter what the amount is.

    Reply
  11. The President doesn’t enact a budget” the House of Representatives does””And whose budget is sent to the House? The President’s.””””In 1921″” the Budget and Accounting Act moved many of the preliminary budget-setting functions to the President and the Executive Branch. The act established the Bureau of the Budget (now the Office of Management and Budget) as an Executive Branch agency that works with the President on drafting a budget; it also established the General Accounting Office (now the Government Accounting Office) as an auditor reporting to Congress.Most importantly the 1921 Act required the President to submit a proposed annual budget for the federal government to Congress”” which added to the considerable power allocated to the Executive Branch.””””Learn civics or keep looking like a fool on the internet.””””Ol Barry had a lot of crap to cleanup after George’s war party””””Really? Then why did NOT ONE of Barry’s budgets sent to Congress cut spending? So much for him ‘cleaning up’. He even had the Dems in full budget control of both Houses of Congress in his first two years to pass it.””””I suppose you could have done so much better.””””Sure I could! I’d have abolished entire federal departments and ALL the entitlement programs before you could scream”””” “”””That Warrentheape guy is now making my grandma eat cat food down at the shelter!”””””””

    Reply
  12. Yeah so? Doesn’t have any bearing on what my point was.A tax cut from 91{22800fc54956079738b58e74e4dcd846757aa319aad70fcf90c97a58f3119a12} to 70{22800fc54956079738b58e74e4dcd846757aa319aad70fcf90c97a58f3119a12} is a tax cut. ANY tax cut on work/production is a supply side tax cut. Doesn’t matter what the amount is.

    Reply
  13. “The President doesn’t enact a budget, the House of Representatives does”

    And whose budget is sent to the House? The President’s.

    “In 1921, the Budget and Accounting Act moved many of the preliminary budget-setting functions to the President and the Executive Branch. The act established the Bureau of the Budget (now the Office of Management and Budget) as an Executive Branch agency that works with the President on drafting a budget; it also established the General Accounting Office (now the Government Accounting Office) as an auditor reporting to Congress.

    Most importantly, the 1921 Act required the President to submit a proposed annual budget for the federal government to Congress, which added to the considerable power allocated to the Executive Branch.”

    Learn civics or keep looking like a fool on the internet.

    “Ol Barry had a lot of crap to cleanup after George’s war party”

    Really? Then why did NOT ONE of Barry’s budgets sent to Congress cut spending? So much for him ‘cleaning up’. He even had the Dems in full budget control of both Houses of Congress in his first two years to pass it.

    “I suppose you could have done so much better.”

    Sure I could! I’d have abolished entire federal departments and ALL the entitlement programs before you could scream, “That Warrentheape guy is now making my grandma eat cat food down at the shelter!”

    Reply
  14. Yeah, so? Doesn’t have any bearing on what my point was.

    A tax cut from 91% to 70% is a tax cut. ANY tax cut on work/production is a supply side tax cut. Doesn’t matter what the amount is.

    Reply
  15. The economy, and the environment it exists in, is constantly changing and, potentially, in such ways that any predictive indicator may eventually become less reliable.

    This is a way of saying that economists make predictions based upon the past, but when things are happening that have never happened before, their predictions begin running into problems.

    Although there have been several successes using the inverted interest rate indicator, there have also been several misfires.

    Keep in mind that part of the reason that short term interest rates might be rising is simply because the Fed is raising rates so as to slow growth so that, in turn, inflation might be slowed. There is some logic in rising short term rates slowing sales and therefore slowing the economy.

    But what about the long term interest rate? Why is the relationship between it being low while the short term rate is high?

    This may seem especially strange as the Fed really has little effect on long term rates. That is driven more by the global demand for credit. A weak economy can lower demand for long term credit and, therefore, long term interest rates.

    So, yes, a drop-off in growth due to an increase in short-term interest rates, coupled with an already weak economy, does seem to create fertile ground for a recession.

    But the question then becomes one of whether or not long term demand for credit is low because the economy is weak, or simply because, for the time being, firms don’t need or want all the long term credit they can get. Either cause of low demand for long term credit would tend to keep the long term interest rates low.

    But if it is not due to a weak economy, why would the demand for long term credit be low? Possibly businesses are realizing increased production or lower costs through new technology and techniques, most notably automation. Possibly because they have just received large tax breaks, reducing their need for long term credit, especially if they are using the increased income to buy back their own stock, rather than expanding the firm or its production.

    Do these sound familiar?

    If this is the case then the inversion might not presage a recession as it would lack the one-two punch of representing a slow-down when things are already in poor shape. In fact, if the economy is relatively strong (which does actually appear to be the case at the moment . . . knock on wood), then it could conceivably shrug off a higher short-term interest rate without even much, if anything, of a slow-down.

    This is what I meant at the beginning, when I said:

    ‘The economy, and the environment it exists in, is constantly changing and, potentially, in such ways that any predictive indicator may eventually become less reliable.’

    Finally, a quote from Peter Lynch, patron god of investors:

    “More money is lost from people trying to avoid the next correction than has ever been lost by the corrections themselves.”

    Reply
  16. The Tax rate for top earners at the time was 90%…so you see how you have been deceived and how you were deceived…right?…They leave that part out..what is Warren Buffett’s tax rate?…15% maybe?

    Reply
  17. The President doesn’t enact a budget, the House of Representatives does. Who are you mad at? Ol Barry had a lot of crap to cleanup after George’s war party (talk about 100 of billions of waste) and general economic implosion. That does take some money to fix. I suppose you could have done so much better.

    Reply

Leave a Comment