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An indicator that often points to recession could be giving a false signal this time


There is an economic indicator that's predicted every recession since 1969, and right now, it's screaming that a recession is on the way. Darian Woods and Adrian Ma from our daily economics podcast, The Indicator From Planet Money, tell us about the inverted yield curve and why this time it might be wrong.

DARIAN WOODS, BYLINE: Campbell Harvey, a Duke University economist, is the guy who discovered this model about the yield curve and its predictive powers.

CAMPBELL HARVEY: So according to the model - the model says we will have a recession.

ADRIAN MA, BYLINE: Yield basically means interest rates, and the yield curve refers to the way that these interest rates tend to go up the longer you lock away your money in treasury bonds. Treasury bonds are arguably the most important investment showing how people around the globe are feeling about the U.S. economy - specifically whether they think the economy is going to get better in the future or worse.

HARVEY: So almost all the time, the long-term rate is higher than the short-term rate, and we call that a normal yield curve.

WOODS: It's a literal line sloping up because to get people to invest in longer term treasury bonds, investors need some incentive - higher interest rates.

MA: But when things are not normal, when there are economic storm clouds on the horizon investors flock to long-term investments like the 10-year and 20-year Treasury bonds. And with this increased demand, the treasuries don't need to offer such a high interest rate. And meanwhile, because the Fed is raising short-term interest rates to battle inflation, that drives up the interest rates on things like 3-month treasury bonds.

HARVEY: And that's the so-called inverted yield curve where you've got short-term rates that are higher than long-term rates. That is bad news according to my research.

WOODS: Campbell looked at when the interest rate on 3-month treasuries was higher than the 10-year treasuries, and he found that when this difference persisted for a full calendar quarter, eventually economic growth would start to plunge, and there would be widespread job losses.

MA: Well, those criteria have been checked off. The yield curve inverted towards the end of 2022, and it stayed inverted.

WOODS: But Campbell says there are many reasons now why the model could be giving a false signal.

MA: For one thing, today's data shows that there are 1.7 job openings for every unemployed person.

HARVEY: And what that means is if you do get laid off, the duration of your unemployment is low. So it's very short unemployment.

WOODS: Campbell's second reason why the economy might be fine comes from looking back at the last long recession in 2008 and how indebted people were then.

HARVEY: Housing caused a lot of trouble in the global financial crisis.

WOODS: The global financial crisis caused a terrible downturn fueled by heavily indebted homeowners. But now Americans have far less debt.

MA: The final reason Campbell says we shouldn't necessarily freak out right now is that the yield curve might be less predictive because everyone knows to watch out for it now.

WOODS: For instance, businesses that are watching the yield curve might be more cautious as a result, and they might not overinvest in things like new factories or hiring a bunch of people. So when slower growth arrives, Campbell says they're better able to withstand it. In other words, the yield curve might be so right that it becomes wrong.

MA: Adrian Ma.

WOODS: Darian Woods. NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.
Adrian Ma
Adrian Ma covers work, money and other "business-ish" for NPR's daily economics podcast The Indicator from Planet Money.

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