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American economist has record of 100% in predicting recessions. What does he say for this year

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American recessions have been preceded by an inverted yield curve – when short-term rates exceed longer-term rates – since the late 1960s. Fast forward to 2023, and that is exactly what is happening to the US Treasury yield curve last month and a half. However, Harvey is saying that this time the US economy will manage to avoid a real slump, although it will continue to slow down for a while longer.

“My yield curve indicator turned red, and it’s 8 to 8 in predicting recessions since 1968 — no false alarms,” ​​Harvey, now a professor at Duke University’s Fuqua School of Business, said in an interview Tuesday. reasons to believe, however, that it is flashing a false signal.”

The spread between three-month rates and 10-year yields has fallen to nearly minus one percentage point last month, from 234 basis points in May 2022. The spread, on which Harvey’s work is based, has consistently reversed since mid-November and hovered around minus 82 basis points Wednesday.

Although the curve has been inverted for the ninth time since 1968, Harvey said it probably isn’t a harbinger of a recession.

One reason is that the yield-growth curve has become so well known and widely publicized in the popular media that it now impacts behavior, he said. Awareness prompts businesses and consumers to take risk-mitigating measures, such as increasing savings and avoiding large investment projects — which bodes well for the economy.

Another boost to the economy comes from labor markets, where the current glut of labor means laid-off workers are likely to find new jobs faster than usual. In addition, he said, given that the biggest job cuts so far have been in the technology sector, the recently laid off high-skill workers are unlikely to be out of work for long either.

‘Dodge the bullet’

Harvey’s model was tied to inflation-adjusted yields and he said the fact that inflation expectations are on the reverse – meaning traders see price pressures easing over time – also lessens the chances of a recession ahead. .

“When you put it all together, it suggests we can dodge the bullet,” Harvey said. “Avoiding the hard landing – recession – and achieving slow growth or lower negative growth. If a recession hits, it will be mild.”

The level of real earnings also casts doubt on the sign of recession. US 10-year inflation-adjusted yields are likely well above their three-month counterparts. While there are no three-month breakeven rates, crossing the latest annual CPI reading with one-year breakeven levels would return a negative real rate for the term, compared to 10-year real yields above 1.5 %.

Harvey’s view is not the consensus. Many Wall Street firms are calling for a recession later this year or early 2024, after the Federal Reserve’s most aggressive hike in decades to curb inflation.

Former Fed Chairman Alan Greenspan said on Tuesday that a US recession was the “most likely outcome,” a view also shared by former New York Fed Chairman William Dudley.

If the US economy manages to avoid recession, for Harvey, that does not mean that his model is now debunked.

“In science, we use models all the time, and they are simplifications of reality,” he said. “And part of the scientist’s skill is knowing when to deploy the model and when not to, or in other words, know the limitations of the model. And maybe I’m in a good position to know the limitations, since it’s my model.”

A wild card, he said, is if the Fed, after being late to raise rates last year, pushes them too high.

Last month, Fed officials raised interest rates by half a percentage point, raising their benchmark to a target range of 4.25% to 4.5%. Quarterly forecasts also released showed rates ending next year at 5.1%, in line with the median forecast, with no rate cuts before 2024.

Fed policymakers at their meeting last month also affirmed their determination to bring inflation down, according to minutes of the Dec. 13-14 meeting released on Wednesday.

“I believe the time to end the squeeze is now,” Harvey said.

This story was published from a wire service feed with no changes to the text. Only the title has been changed.

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