Is the US Economy Really on the Verge of Recession?

It has been a tough week in the US equity markets, with the Dow Jones Industrial Index falling as much as 800 points on Wednesday, but finishing the week down 400 points after some recovery later in the Friday trading session. Markets went into meltdown after the 10-Year US Treasury bond priced with a yield less than the 2-year bond something market strategists call an inverted curve. Economists and other market analysts believe that an inverted yield curve tends to be a precursor to an economic recession because it signals that the market expects low inflation and slow economic growth. On average, an economic downturn tends to follow a yield curve inversion in about 18 months. (For more see, US Fed Under Pressure to Slash Rates - Will They Buckle?)

Retail Sales Paint a Different Picture

Not everyone is convinced that an inverted yield curve is a sure sign of economic recession. For example, former Federal Reserve Chair Janet Yellen said in an interview on CNBC that the markets may be wrong to trust the yield curve inversion as a recession indicator this time. Bank of America Merrill Lynch CEO Brian Moynihan said in a Bloomberg interview that he does not see a looming US economic recession. One factor that analysts suggest is supporting the US economy is a good reading in retail sales. For example, the US Census Bureau released data last week showing that retail sales grew 3.4% in July compared to the same period in the previous year. This reading is a notable increase from weaker retail growth figures at the beginning of 2019.

Robust retail sales are one bright spot, but analysts are concerned that fears of a recession could become a self-fulling prophecy for the US consumer. In other words, consumers could talk themselves into creating an economic slowdown if they pull too far back on spending. One economic indicator that economists watch to gauge the health of the consumer is the University of Michigan’s consumer sentiment indicator, which came in weaker than expected last week. U.S. consumer sentiment surprisingly fell to 92.1 in August. Economists expected the preliminary figure for August to reach 97, down only slightly from a reading of 98.4 in July.

Bottom Line

Trade tension between China and the US and a falling oil price have market participants worried that a global economic slowdown is on the cards. Investors see the fact that the US Treasury curve inverted last week as the latest market signal that a US economic contraction could be around the corner. However, history shows that not ever inverted yield curve was followed by a recession, and there is little other evidence that the US economy is about to collapse. For now, it may be best for investors to wait and see what the Fed’s response will be at its next meeting on September 17-18 and look for value opportunities for the rest of 2019.

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Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.