The two big reasons there really might be a recession in 2020

Posted on Posted in Financial Trends, Investment & Financing, Market Updates

Maybe the best reason to think there won’t be a recession in 2020 is that so many people are saying there will be.

The idea being that the more people are worried about something, the more they should do to try to avoid it — right? You’d certainly think so, but not always. Consider the housing bubble: Economists including Paul Krugman and the Center for Economic and Policy Research’s Dean Baker spent years warning about the impending danger, but it didn’t matter. Policymakers didn’t do anything, and everyone else was too busy trying to get in while the getting was good to concern themselves with whether it was sustainable.

Which brings us to our two big risks today. The first is that interest rates, though still low by pre-crisis standards, are starting to get a little high by our post-crisis ones. In fact, the best recession predictor we have — the difference between the government’s 10-year and two-year borrowing costs — is beginning to flash yellow.

Why does that tell us so much? Well, it has to do with the economic story that’s embedded within longer-term interest rates. Those, you see, show us what markets think short-term interest rates are going to average over that time, plus a little extra to make up for the risk that inflation ends up being higher than people thought it would. So when long-term rates are lower than short-term ones, what’s known as an “inverted yield curve,” it’s telling us that markets think the Federal Reserve is going to have to stop raising rates and start cutting them in the near future. And when would it do that? Easy: when it’s trying to fight a recession.

The good news is that this hasn’t happened yet, but the bad news is it probably won’t be long until it does. Not when 10-year interest rates are a mere 0.25 percentage points above two-year ones. All it should take is another rate hike or two for it to invert, at which point, if history is any guide, we could expect a recession within the next year or so. Right around, you guessed it, 2020.

Read more on The Washington Post

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