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Economic Outlook: Difference between revisions
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# If investors see greater risk of recession, they will attribute higher value to short-term assets that they can easily liquidate to finance spending on goods and services. Hence, they will require higher compensation to keep holding long-term securities. This means a yield curve inversion in this escenario is an expectation of lower odds of a recession. | # If investors see greater risk of recession, they will attribute higher value to short-term assets that they can easily liquidate to finance spending on goods and services. Hence, they will require higher compensation to keep holding long-term securities. This means a yield curve inversion in this escenario is an expectation of lower odds of a recession. | ||
Due to these contradictory reasons, not all yield curve inversion will signal a recession, thats' why is important to understand the current enviromnent we are in and the sentiment among inversions. Since several surveys has been done recently already, especially the latest Philadelphia Fed survey of professional forecasters shows the probability of a recession in the next year is the highest in the 50+ years this survey has been conducted<ref>https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q4-2022</ref>, we can conclude | Due to these contradictory reasons, not all yield curve inversion will signal a recession, thats' why is important to understand the current enviromnent we are in and the sentiment among inversions. Since several surveys has been done recently already, especially the latest Philadelphia Fed survey of professional forecasters shows the probability of a recession in the next year is the highest in the 50+ years this survey has been conducted<ref>https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q4-2022</ref>, we can conclude thant this time investors are pricing in mostly higher odds of a recession in the yield curve inversion. | ||
What is the current data telling us? | What is the current data telling us? | ||
# The 10Y2Y spread<ref>https://fred.stlouisfed.org/series/T10Y2Y</ref>: Current inversion around is -70 bps,the worst level | # The 10Y2Y spread<ref>https://fred.stlouisfed.org/series/T10Y2Y</ref>: Current inversion around is -70 bps,the worst level since the 1980s, the continuing inversion started on July 2022. | ||
# The 10Y3M spread<ref>https://fred.stlouisfed.org/series/T10Y3M</ref>: Current inversion around -80 bps, worst level since the data is available, the contuining inversion started on October 2022. | # The 10Y3M spread<ref>https://fred.stlouisfed.org/series/T10Y3M</ref>: Current inversion around -80 bps, worst level since the data is available, the contuining inversion started on October 2022. | ||
# Majority of the yield curve is inverted at this moment, this condition has always preceded a recession <ref>http://www.worldgovernmentbonds.com/country/united-states/#:~:text=The%20United%20States%2010Y%20Government,last%20modification%20in%20December%202022).</ref> | # Majority of the yield curve is inverted at this moment, this condition has always preceded a recession <ref>http://www.worldgovernmentbonds.com/country/united-states/#:~:text=The%20United%20States%2010Y%20Government,last%20modification%20in%20December%202022).</ref> | ||
In conclusion, due to the fact that the Yield curve inverts due to expectations of higher odds of recession, that the Yield curve has inverted before each recession and that usually the average lead time between the inversion and the recession is equal or greater than one year, there is a high likehood that relying on this indicators the recession risks in the US economy are amplify significant for the second half of 2023 onwards. | In conclusion, due to the fact that the Yield curve inverts due to expectations of higher odds of recession, that the Yield curve has inverted before each recession and that usually the average lead time between the inversion and the recession is equal or greater than one year, there is a high likehood that relying on this indicators the recession risks in the US economy are amplify significant for the second half of 2023 onwards. | ||
=== 2. Housing Market Activity === | |||
Housing accounts for a significant portion of investment spending by American households and overall economic activity. And has a significant impact on other industries, including labor, construction, raw materials, consumer durables, banking, and real estate. According to Leamer<ref>https://www.nber.org/system/files/working_papers/w13428/w13428.pdf</ref>, in its research paper he shows that it is residential investment that contributes most to weakness before recessions. In six of the ten recessions since 1950, residential investment was the greatest contributor to weakness prior to the recession with an average contribution of 22% of weakness in gdp 1 year prior to the recession. And that an unusual residential investment contribution to GDP growth in one quarter predicts twice as much contribution from some other sector the next quarter. | |||
In the residential investment data displayed in Figure 12 there is one false positive in 1951-2 and another in 1966 -67. In both cases housing was weakening substantially but there was no recession. Why is that? Those two false positives occurred coincidentally with a big ramp-up in defense spending for the Korean War and the Vietnam War. Alarms of forthcoming recessions that were met by a response that prevented the recessions from occurring. | |||
Also important to point out that is especially volumes that matter for real GDP accounting, not prices. Prices can matter indirectly through a wealth effect, but be a little skeptical about this. And that the sluggishness of price adjustments is what makes the volume cycle so extreme, and what makes housing so important in recessions. | |||
What is the current data telling us? | |||
1. | |||
== References == | |||