This week the US “yield curve” inverted. Our archive article explains why such inversions often foreshadow economic turmoil
In America, such “inversions” have foreshadowed economic turmoil. For all eight recessions since 1960, three-month interest rates exceeded ten-year ones on at least one day during the previous year. The signal has sounded just one false alarm.
This logic should apply everywhere. Yet only in America has the curve been a soothsayer. In a dataset of 16 other rich countries, reaching as far back as 1960, 51 of the 95 recessions were not preceded by an inversion during the previous two years. Moreover, the curve seems prone to crying wolf. On 63 occasions, these non-American economies kept growing despite inverted yield curves.
However, squashing yield curves and growth figures into a pair of binaries—inverted or not, and recession or not—leaves precious data on the cutting-room floor. A better test would check whether flattening curves foreshadow slowdowns, and steepening ones presage economic acceleration.
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