Inverted Yield Curve and the Economy

Talk of the next U.S. recession has made headlines recently, partly because the yield on 10-year Treasuries has dropped below that of 3-month Treasuries twice this year — once in March and again in August. This phenomenon, known as an “inverted yield curve” in the bond markets, happens when the rates paid on short-term U.S. Treasury bills exceed the rates paid on long-term Treasury notes. Historically, inversions in the yield curve have been a warning sign that a U.S. recession could be looming. However, AMG’s research suggests that the Treasury yield curve is a far less reliable indicator of a recession today than it was in the past.

Instead, AMG has identified additional key leading indicators that provide an outlook for the U.S. economy. These include:

• Four-week moving average of initial unemployment insurance claims,
• Year-over-year change in the Conference Board’s Consumer Confidence Index,
• Share of U.S. banks tightening lending conditions, and,
• Chicago Fed’s National Activity Index, a broad measure of U.S. economic strength.

These key measures currently indicate that the U.S. economy is healthy — and that no recession is imminent — but they also suggest that a mild slowdown could be possible in the short term. Going forward, the health of the economy will likely depend on how well policymakers at the U.S. Federal Reserve (Fed) are able to deal with any such slowdowns and to what degree they can continue to support economic growth. AMG’s research suggests that, as long as U.S. inflationary pressures remain modest, Fed policymakers can keep interest rates low and will likely be able to take the necessary actions to sustain the U.S. economic expansion.

At AMG, our expert and research-driven approach sets us apart from other wealth management firms. It allows us to provide forward-thinking guidance to our clients that enable them to stick to their financial plans and not panic when there is volatility in the economy and markets.