We will avoid a recession-Economist
2023.01.04 11:24
We will avoid a recession-Economist
Budrigannews.com – Since he demonstrated in his dissertation at the University of Chicago decades ago that the shape of the bond yield curve was linked to the path of US economic activity, economist Campbell Harvey has had a winning track record.
Since the late 1960s, an inverted yield curve, in which short-term rates exceed longer-term ones, has preceded US recessions. That is exactly what has been occurring with the Treasury yield curve over the past month and a half, fast forward to 2023. Harvey, on the other hand, asserts that this time around, despite the fact that it will continue to slow for a little while longer, the US economy will be able to avoid a real slump.
In an interview on Tuesday, Harvey, who is now a professor at Duke University’s Fuqua School of Business, stated, “My yield-curve indicator has gone code red, and it’s 8 for 8 in forecasting recessions since 1968 — with no false alarms.” Harvey was referring to the indicator. “I have motivations to accept, notwithstanding, that it is blazing a misleading sign.”
From as high as 234 basis points in May 2022, the gap between 3-month rates and 10-year yields has narrowed to nearly minus one full percentage point this past month. Harvey’s work is based on the spread, which has been consistently inverted since mid-November and was around minus 85 basis points on Wednesday.
Harvey stated that despite the curve being inverted for the ninth time since 1968, it probably is not a sign of a recession.
He stated that one of the reasons is precisely the fact that the relationship between the yield curve and growth has become so well-known and extensively covered in popular media that it now influences behavior. Companies and consumers are more likely to take risk-reduction measures, such as increasing savings and avoiding major investment projects, as a result of the awareness.
The current excessive demand for labor means that laid-off workers will likely find new positions more quickly than usual, which is another strong boost from the job markets. He added that, given that the tech industry has seen the most job cuts thus far, those highly skilled workers who were fired are also unlikely to be out of work for very long.
Harvey said that the fact that inflation expectations are inverted, which means traders see price pressures decreasing over time, also reduces the likelihood of a recession. His model was linked to inflation-adjusted yields.
Harvey stated, “It suggests we could dodge the bullet when you put all of this together.” avoiding a hard landing, such as a recession, and experiencing either moderately slow growth or negative growth,” Harvey stated. If there is a recession, it will be mild.
The majority does not agree with Harvey’s view. Following the Federal Reserve’s most aggressive hike campaign in decades to control inflation, many Wall Street firms predict a recession this year or early 2024.
On Tuesday, former New York Fed President William Dudley agreed with former Federal Reserve Chair Alan Greenspan that the “most likely outcome” is a recession in the United States.
Harvey maintains that his model remains valid even if the US economy survives a recession.
He stated, “Models, which are simplifications of reality, are used frequently in science.” Additionally, knowing the model’s limitations, or when to use it and when not to, is an essential skill for scientists. Given that it is my model, it’s possible that I am well-positioned to be aware of its limitations.
He said that one “wildcard” could occur if the Fed proves to be pushing rates too high after being late last year.
The Federal Reserve raised interest rates by half a percentage point last month, bringing their benchmark to a range of 4.25 percent to 4.5 percent. In addition, published quarterly forecasts indicated that rates would remain unchanged until 2024, with a median forecast of 5.1%.
Harvey stated, “I believe the time to end the tightening is now.”
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