A Recession Is Coming - Brace for Impact First things first
What is a Recession?
A recession is a period when the economy isn't doing well. It means businesses are selling less, people are losing jobs or not getting raises, and overall, there's less money being spent. It's like a slowdown in the economy where things are not growing, and sometimes they shrink. This period of economic decline usually lasts for a few months or longer. Usually, when we have two consecutive quarters of negative Gross Domestic Product (GDP) we say that we are in a recession.
Now, let's look at previous recessions to see if we can find some patterns that help us predict the coming one. 😊
This is how you can navigate through the chart:
- past recessions are highlighted with orange colored boxes based on the data from "FRED economic data".
- The purple line chart shows the US inflation rate.
- The US GDP is shown in a green step-line chart.
- The US interest rate is shown with an orange line.
- The Yellow line chart shows the unemployment rate in the US.
- The most important line chart here is the blue one that shows the spread between the 10-year bond yield and the 3-month bond yield (Yes we could also use 2-year instead of 3-month).
This blue line, the yield curve, is important to us because it's a reliable indicator that almost every time gave us a heads up for a recession (if you were looking at it of course 😁). When it falls below zero, we call it the inverted yield curve and we hit a recession almost every time it gets back up after spending some time below zero.
An inverted yield curve tells us that the market participants are concerned about future economic growth It can lead to tighter financial conditions, reduced lending, and lower consumer and business spending, which can contribute to a downturn in the economy.
With that said, take a look at the chart and you can easily spot the repetitive pattern of interest rate hikes/cuts, unemployment rate, and the inverted yield curve just before each recession.
With the strong possibility of having the first rate cut in September, and the patterns you see on the chart, can you say that we are going to have a hard landing and a recession? I would say yes.
If you say we are not going into a recession and your counter argument is backed by a low unemployment rate and a positive GDP and a declining inflation rate, this chart does not support the idea.
I know there are other factors that might support the soft landing scenario, and I would like to have your point of view on this. So, please share your thoughts in comments section if you are reading this post through Tradingview. 😊
For further research, you can pull up the charts of indices like S&P500 or commodities of your choice to see how they moved during each recession. This will help you find some patterns that might assist you in your future investments.
