Recessions are unpleasant. Usually they involve large job losses, permanent incomes and widespread misery. And when this recession occurs in the largest economy in the world, this is a great voice for your business partners.
Investors are increasingly concerned that the American recession of beer.
Of course, as economists, they may be wrong.
But Is there a precise way to predict recession?
The analysis of US government bonds can be one of the most accurate ways.
A study by the US Central Bank showed this Bond markets were predicted by five recessions that the US experienced. since 1955
These bonds, known as American Treasuries., are issued as a form of a government loan to finance spending.
They come with different maturities and offer investors a profit that is paid in regular installments.
This rate is the percentage of the bond's final value. Since bonds can be freely negotiated, their prices vary.
If the demand is high, the prices and rate of bond yields are increased according to the market price, or your return (return), reduced.
On the contrary, the lower price means an increase in efficiency.
What affects the price of bonds?
Its attractiveness compared to other investments (If the yield is high and therefore the price is low, buyers will probably be attracted) as well as the expectations of future interest rate developments.
What does this have to do with the recession?
Controlling analysts bring in a maturity range of up to 30 years to plots yield curve.
Lower returns, the lower the expected interest rate, and the economy is expected to deteriorate.
Long-term maturity bonds are likely to have a high return to replace holders of these securities with inflation and a longer holding period.
In general, when the forecast is that the activity is expanding rapidly, the yield curve tends to increase, which means that the interest rates move upwards.
However, if the yield curve is "turned", which usually means that the yield of a 10-year bond is lower than the yield on a two-year bond, it Draws attention to economic health.
But how good are these curves for forecasting recessions?
Bond markets were reliable signals of the expectation of all the recessions that the United States went through in 1955.
But in the mid-sixties, the replacement of the treasury yield curve was followed by a slowdown in activity rather than an absolute decrease.
So it is not inevitable, but it is probably the most reliable indicator that exists.
What? the yield curve does not tell us when the US economy can turn.
In the last 60 years, the recession began between 9 and 24 months after the curve of profitability was abolished.
At present, the unemployment rate is modest at 3.7%, while the economy continues to grow rapidly.
But The switching point must not be far off.
In addition, the forecasts derived from profitability curves can be self-achievable.
Just as consumers respond to warnings about difficult times with spending controls, banks are more cautious about loans when they realize that the return curve is turned.
Less accumulation of loans in the form of mortgages, car financing, credit cards or loans to companies means less funds to increase growth.
Warnings on bond markets should be taken seriously, and not only in the markets.
Capital Economics Advisor warns there is a 30% chance for the US to recession in 18 months: in time for the period leading to the next presidential election.