The media tells us the yield curve is inverted and this means a recession is both certain and imminent. Every media outlet that’s not for President Trump has been bouncing with glee to point it out to us. There is a point to the story too: An inverted yield curve, where it costs more to borrow for short terms than longer, where long-term interest rates are lower than short-term, is usually a sign of an impending recession.
The thing is, though, economic thigh bone does have to be connected to the economic hip bone. I learned that from Paul Krugman so it must be true. The meaning being that if this thing is happening over here then we should be able to see this other thing happening over there. Everything must add up. For example, if wages have been lagging productivity then the labor share of the economy must have been falling. It hasn’t (not over the time period usually claimed it hasn’t), therefore wages haven’t been lagging productivity. No matter what people tell us, it simply hasn’t been happening. It must all balance and the sums must be complete.
So it is with our reports of the yield curve inverting. Even the English are noting it. Steve Hilton’s arguing back as Steven Hilton was bound to do. And to be fair, looking at the detailed statistics, there’s a strong correlation between this event and an imminent recession. Yet, that’s still not enough. Because, as Hilton is saying, everything else is looking just fine.
Sure, we’ve got those worries over trade. What is the president, prompted by Peter Navarro, going to get wrong next there? But trade isn’t that large a part of the American economy. Pretty much everything else is looking pretty peachy. Unemployment is down at generational lows, and employment (not quite the inverse) is at generational highs. Significant wage growth is finally happening, as well as economic growth, as far as we can see. There’s no build up of inventories, that other recession early warning sign.
When our various sums don’t in fact balance across the economy, we’ve got to decide which one is the outlier.
It’s the yield curve. Every central bank on the planet is playing with interest rates. That’s what quantitative easing actually is. When we’ve got every central bank and treasury trying to influence interest rates we’d be more than a bit foolish to take interest rates as carrying their normal sort of message. The likely answer here being what JP Morgan tells us. The actual detailed answer being that as Europe and Japan do so much quantitative easing and manipulation that interest rates on government debt are negative then money is flowing into the American markets. Which then, obviously, changes interest rates here. In Denmark, there’s even a bank which will pay you to take out a mortgage. No, really, there are negative interest rates on buying a house — these are not normal times with numbers giving their normal messages.
That foreigners park their money in America, the cause of that yield inversion, is not a signal the United States is about to have a recession.
Is there a possibility the U.S. will have a recession? At some point it’s a certainty since we haven’t abolished the business cycle. Imminently? That yield curve is saying yes, everything else is saying no. So, it’s unlikely. Our one real and major problem here being that recessions are, in both theory and practice, not predictable. It’s not possible to accurately forecast one. We’ll actually find out after we’ve had it, which is the way we find out about nearly all of them.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
