Those three U.S. recession indicators – how near or far are those from being invoked? End of 2018 edition

We wrote about three slightly different U.S. recession indicators that have been predictive of the past few recessions and have been tracking how near or far are those from being invoked, here’s where we are at the end of 2018,


Unemployment rate

The US Bureau of Labor Statistics data reveals that the US unemployment rate has a hit a new multi-year low four to eight months before the start of every recession since the 1940s. In other words, the economy hits full employment four to eight months before the start of a recession.

The unemployment rate goes up at least 1% and then doesn’t go back down without a recession occurring.

US unemployment rate until November 2018

The current U.S. unemployment rate is 3.7% (Related: The U.S. unemployment rate is at an 18-year low but only because the labor force participation rate is close to a 40-year low) and U.S. employers added around 155,000 jobs in November, any number lower than 106,000 would see the unemployment rate rise.

The U.S. job market is still good but there could be potential issues in the new year if corporate results aren’t as expected for the last quarter of the year.


Yield curve inversion

The US 10-year Treasury constant maturity yield minus the 2-year Treasury constant maturity yield spread has been a good indicator of past recessions. (Related: The yield curve inversion plus why banks and banking stocks are impacted by it)

Yield curve inversion which happens when the spread turns negative and has preceded the last seven straight recessions. Currently (as of end of day on the 20th of December) the difference is just 12 bps. 

10 year minus 2 year yield short term view 20181226 10 year minus 2 year yield long term view 20181226


Treasury yield curve convergence

And the 30-year, 20-year and 10-year Treasury yields have almost converged three to six months before each of the past four recessions as well.

US yield convergence 6 year view 20181226 US yield convergence 15 year view 20181226 US yield convergence 20 year view 20181226

Yields as of the 20th of December were,

2-year 2.67%
3-year 2.65%
5-year 2.65%
7-year 2.72%
10-year 2.79%
20-year 2.92%
30-year 3.02%

Just going by these indicators, a U.S. recession is at least 3 quarters away but is at the closest point since we began tracking the indicators.


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