Today, the Allworth Recession Index is at 10, suggesting there is a low risk of recession (through the remainder of 2019, at least).
Prior to the Great Recession, many leading indicators we followed were signaling for a slowdown. But, currently, only one of our main leading indicators points to a recession. The indicator that is sending a red flag is the difference between long-term interest rates and short-term interest rates. Specifically, it’s the 10-year treasury bond rate and the 3-month treasury bond rate that show elevated risk.
This part of the yield curve has inverted, meaning short-term rates are greater than long-term rates. These interest rates can be thought of as your reward for taking risk, so when you’re rewarded more for investing in a 3-month bond than a 10-year bond, there is more risk in the near term and a higher chance of an economic downturn.
When yield curve inversions have occurred in the past, recessions usually followed. However, the time to the next recession following an inversion was usually at least a year off. The last time this part of the yield curve inverted, a recession didn’t occur until 22 months later.
Of course, this indicator is not perfect (no indicator is). It falsely predicted recessions in 1966 and 1998.
What followed both those inversions was the Federal Reserve (Fed), our nation’s central bank, cutting overnight interest rates to engineer a soft economic landing. At this point, the market is pricing in about two to three interest rate cuts in 2019 (this is calculated using Fed Funds futures contracts), so perhaps the Fed can orchestrate another soft landing.
To be clear, we take the yield curve inversion seriously. However, we prefer to look at a suite of indicators instead of just one. That is why we pay close attention to not just the Allworth Recession Index but also to many other economic data points.
We believe that this current expansion will indeed enter the record books as the longest in history (but that does not mean that a recession is imminent).
We will never use the calendar to justify an economic view, but instead, use data.
And, as of today, data suggests a low risk of recession.