Economic Outlook

The current economy is in a very uncertain spot and many mixed signals aren’t providing a clear direction. A highly meaningful indicator is the yield curve and its inversion since June 2022. The yield curve allows investors to compare the returns of treasury investments with different maturity dates. It is essentially the difference between the 3-month or 2-year treasury yield and the 10-year treasury yield. This difference gives us a glimpse into the current cycle of the economy because it can either be positive or negative. If the yield curve is positive, this indicates that there is a consensus that the economy is more likely to be well off in the next two years rather than in 10 years. This makes sense since there is a much higher degree of uncertainty about the state of the economy in 10 years than in two years or three months. On the other hand, when the yield curve is negative, this indicates a consensus that the economy is likely to be in a better position in 10 years rather than two years from today. Thus, the inversion of the yield curve is a serious warning and a crucial indicator to all economists.

The inversion of the yield curve is so important because it has accurately predicted all past recessions since 1950 except for one. Usually, after about 6 to 24 an inversion of the yield curve, the economy has set into recession. This makes the yield curve one of the most important economic indicators and something to be concerned about since it is currently inverted. Moreover, many recent circumstances such as the war in Ukraine, high-interest rates, corporate real estate turmoil, tensions with China, and widespread natural disasters, etc., have been troubling the current economy. It is uncertain how the future will play out and the market reacts to these ongoing events. 

The current outlook on the economy isn’t great due to the inversion of the yield curve. It is certain that the US will face pressures from the recent hikes in interest rates and corporate real estate turmoil. Although the inversion of the yield curve should never be taken as the sole indicator for a recession, it has proven to be the most reliable one. The inverted yield curve puts the US economy in an uncertain position and the chances of recession are high. The question that remains to be answered is whether a resilient economy can curb a recession.