Inverted Yield Curves and Recessions

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Financial CrisisTalk of an incoming recession has been published in every media outlet ever since the “inverted yield curve” phenomenon. The media has covered this crazed story dozens of times and will continue to feed Americans fear, as long as it sells. Recessions are normal in every developed economy. There are ups and downs, it is the cycle of life. However, becoming crazed and expecting a total catastrophe is unreasonable. According to Forbes, “The average length of a growing economy is 38.7 months or 3.2 years.” The last American recession ended in June 2009, which means we have been long overdue for a downturn.
Our first indicator was in March 2019, when interest rates on long-term bonds were suddenly lower than the interest rates on short-term bonds, the inverted yield curve occurred. This meant that Americans were concerned about the near future and were betting on long-term investments. Usually, long-term bonds yield a higher rate of return than short term-bonds but when the demand for long-term bonds is high, the price for those bonds increases as well. These higher bond prices eat away at an investor’s profits before the bond even reaches maturity. Historically this has led to a recession, nine of them to be exact. It is the most reliable signal for an incoming economic slow-down, and it can take 12 to 34 months to hit after the phenomenon. Seventy-four percent of economists surveyed by the National Association for Business Economics believe that a recession will be here by the end of 2021.
Not all is lost! The average American recession lasts a little less than a year and a half according to economists. The Federal Reserve made a .5 interest cut on September 18th, to stimulate growth within the economy helping slow down a possible downturn. President Trump has paused the trade war with China and businesses are preparing for a possible recession yet focusing on growth. Recessions can be led by consumers and their fears of a downturn more than an actual lack of growth within the economy. Whether or not a recession hits, we will have to wait and see, but remember that the American economy is strong, and the American consumer helps drive it. The United States is on the longest economic expansion it has ever seen, and unemployment is at its lowest ever. Stay savvy, positive and prepared!
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