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Investing.com – The US Federal Reserve, President Biden and Wall Street remain adamant that the US economy is not at risk of recession. Anyone who claims otherwise is viewed as pessimistic and deliberately causing disaster.
Jim Reid of Deutsche Bank (ETR:) is one of the rare experts who cast doubt on the soft landing story because there are four facts that all point to a recession and none of them can be ignored.
The expert, along with other analysts, studied the economic downturn that has occurred since 1854. In addition to inflation, the focus was also on bond yields and oil prices and prices.
Each of these four factors has shown some recession-related anomalies over the past approximately 170 years. What is worrying is that everyone is currently saying that there will be a recession.
1. Inflation
Experts noted that the US economy was highly sensitive to inflation of 3 percent or more over 24 months.
This mark has already been broken, as the last time the CPI was below 3 percent was in April 2021. Analysts determined that each time this benchmark was met, there was a 77 percent chance of a recession.
The current decline from a 40-year high of 9.1% plays no role in this analysis. There may also be a long lag between the initial inflation shock and the subsequent recession.
In addition, it does not look like inflation will reach the Fed’s 2% target anytime soon, as inflation actually rose again in August and September.
2. Bond yields
The situation is similar with returns. Typically, yields on ten-year government bonds are lower than yields on 30-year bonds. If this situation changes, experts will come out to talk about a yield curve inversion.
This means that the market expects the situation to worsen over the next ten years.
This is exactly what has been the case since July 2022. Whenever this phenomenon occurred in the past, it was followed by an economic contraction in 74% of cases.
3. Prime interest rate
Interest rates also play an important role in the run-up to a recession. The central bank tries to either stimulate or calm the economy using its key interest rate.
The latter goal is achieved by raising interest rates, because when loans become more expensive, the volume of investment decreases and economic performance declines.
Since 1854, whenever the central bank raised interest rates by more than 2.5 percent over a 24-month period, there was a 69 percent chance of a recession occurring.
As it stands, the Fed has raised interest rates by more than 5% in just 18 months.
4. Oil price
How well a country’s economy is managed also depends on how high energy prices are. The higher the cost, the worse the outlook due to lower margins or a collapse in demand due to higher prices.
Therefore, the price of oil is another good indicator of the health of the economy.
Jim Reid analysts have found that when they rise by at least 25 percent in 12 months, there has been a recession 45.9 percent of the time over the past 170 years. The current rise in oil prices is a clear warning signal, as they have risen by about 33 percent since June.
2023-10-05 12:56:00
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