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Investing.com – The US Federal Reserve, President Biden and Wall Street continue to argue that the US economy is not in danger of a recession. Anyone who claims otherwise is perceived as a predictor deliberately escalating the situation.
Deutsche Bank’s Jim Reed (ETR: ) is one of the rare experts who doubts the soft landing theory, as there are 4 facts pointing to a recession that cannot be glossed over.
The expert, along with other analysts, carefully studied economic downturns that have occurred since 1854. At the same time, attention was paid not only to inflation, but also to profitability, interest rates and oil prices.
Each of these 4 factors has exhibited certain characteristics in relation to recessions over the past nearly 170 years. Alarmingly, they all currently point to a recession.
1. Inflation
Experts noted that the US economy has historically been very sensitive to inflation of 3% or more over a 24-month period.
This mark has already been passed, as the last time the consumer price index was below 3% was in April 2021. Analysts determined that every time this criterion was met, a recession followed with a 77% probability.
The current decline from a 40-year high of 9.1% plays no role in this analysis. In addition, a longer period of time may elapse between the initial inflation shock and the subsequent recession.
In addition, it doesn’t look like inflation will reach the Fed’s 2% target anytime soon, as it already rose again in August and September.
2. Bond yield
A similar situation arises with profitability. Typically, the yield on 10-year government bonds is lower than on 30-year bonds. If this changes, then experts are talking about an inversion of the yield curve.
This means that the market expects the situation to worsen over a 10-year horizon.
This is exactly what has been happening since July 2022. When this phenomenon occurred in the past, it was followed by an economic downturn 74% of the time.
3. Key interest rate
Interest rates also play an important role in the run-up to a recession. This is because the central bank uses its key interest rate to either stimulate the economy or cool it.
The latter is achieved by increasing the interest rate, since when loans become more expensive, investment is reduced and production volume decreases.
Since 1854, when interest rates rose by more than 2.5% over a 24-month period, there was a 69% chance of a recession occurring.
In this case, the Fed raised rates by more than 5% in just 18 months.
4. Oil prices
How well a country’s economy is doing also depends on how high energy prices are. The more expensive they are, the worse the prospects, since either profitability falls or demand decreases due to rising prices.
Thus, oil prices are another good indicator of the health of the economy.
Jim Reid analysts found that over the past 170 years, a recession occurred 45.9% of the time oil prices rose at least 25% over a 12-month period. Thus, the current rise in oil prices is a clear alarm bell, as they have risen by about 33% since June.
2023-10-05 13:09:00
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