Inversion of the Yield Curve

 Photo by Tima Miroshnichenko

By Jim Hingst 

 Jim Hingst is a contributing writer for Sign Builder Illustrated magazine.

An inversion of the yield curve  is one of the most reliable leading economic indicators for predicting recessions.

One reliable indicator of a recession is an inversion of the yield curve. The yield curve graphs the interest rates of U.S. treasuries at various maturity dates.

 

Normally the interest on a 4-week note is lower than that for a 10-year bond. When the yield curve is inverted, the interest rates for the shorter-term notes are higher than the longer-term treasuries. The inverted curve is also known as known as a negative yield curve.

 

When the yield curve arches upward, it generally indicates a positive sign for the economy. On the other hand, when the curve bends downward, it generally tells investors that the economy is contracting. This leading economic indicator has been inverted since late in 2022. That’s more than seven months ago!

 

If it’s so reliable, why aren’t we in a recession now? In the last 70+ years inversions in the yield curve can occur anywhere between 7 months and 20 months prior to a recession. That means that the recession could commence as late as June of 2024 – right before the next election.  

 

Of course, the current administration will likely do everything it can to delay the inevitable at least until after the election. While more government spending could artificially juice the economy, it unfortunately just adds fuel to the inflationary fires.

 

Economists often analyze what is called the “spread” between U.S. treasuries that mature at different times. While an inversion in the yield curve has reliably predicted every recession, the variance or spread between short-term rates and those for 10-year bonds is much more pronounced than in most previous recessions. In fact, the last time the spread has been this great was in the early 1980s. That recession occurred right after President Regan took office for the first time.

 

Another similarity with this period was the high rate of inflation. While inflation has abated some from the summer of 2022, it is still unacceptably high. For this reason, Jerome Powell has suggested that in the later half of 2023 you can expect two or three more rate hikes. Even then, he does not expect that the hikes will tame inflation until 2025. As the Fed increases its rates, banks will continue to increase their loan rates contributing to a slowdown in the economy.

Read these other articles by Jim Hingst:

Harvesting More Leads from Social Media

Choosing a Business Structure

Funding Your Business

Pricing for Greater Profits

Dealing with Competition

Measuring the Success of Business Plans

Developing a Sales and Marketing Plan

Crafting Your Digital Marketing Message

 

About Jim Hingst: Sign business authority on vehicle wraps, vinyl graphics, screen printing, marketing, sales, gold leaf, woodcarving and painting. 

After fourteen years as Business Development Manager at RTape, Jim Hingst retired. He was involved in many facets of the company’s business, including marketing, sales, product development and technical service.

Hingst began his career 42 years ago in the graphic arts field creating and producing advertising and promotional materials for a large test equipment manufacturer.  Working for offset printers, large format screen printers, vinyl film manufacturers, and application tape companies, his experience included estimating, production planning, purchasing and production art, as well as sales and marketing. In his capacity as a salesman, Hingst was recognized with numerous sales achievement awards.

Drawing on his experience in production and as graphics installation subcontractor, Hingst provided the industry with practical advice, publishing more than 190 articles for  publications, such as  Signs Canada, SignCraft,  Signs of the Times, Screen Printing, Sign and Digital Graphics and  Sign Builder Illustrated. He also posted more than 500 stories on his blog (hingstssignpost.blogspot.com). In 2007 Hingst’s book, Vinyl Sign Techniques, was published.  Vinyl Sign Techniques is available at sign supply distributors and at Amazon. 

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