Anticipate recession in this timeframe as predicted by 40year Fed indicator
There is mounting speculation about a potential recession in the United States economy, as various indicators point to uncertainty. According to an analysis by capital market commentary platform The Kobeissi Letter, published on June 22, there is a significant probability of a recession within the next 12 months. The Federal Reserve model, which utilizes the US Treasury yield curve, currently suggests a 52% chance of an economic downturn in the next year. Although this probability has decreased from its peak of 71% in May 2023, it still signals caution for the US economy.
The platform notes that historically, when this model has indicated a recession probability exceeding 30%, an economic downturn has followed within two years. This trend has held true for the last 40 years, highlighting the reliability of the indicator.
Moreover, the yield curve, a critical economic indicator, has been inverted for over 700 days, the longest duration in history. An inverted yield curve, where short-term interest rates exceed long-term rates, typically precedes a recession. This extended inversion further complicates the possibility of a “soft landing,” where the economy slows down without entering a recession, according to The Kobeissi Letter. Given the historical context and current economic indicators, the likelihood of avoiding a recession appears slim. If a recession does not materialize, it will challenge the predictive power of the yield curve.
The platform emphasizes that over the last 40 years, each time the recession probability has exceeded 30%, the US economy has experienced an economic downturn within two years. Additionally, the yield curve has been inverted for over 700 days, the longest stretch in history. Achieving a soft landing may still prove difficult.
Overall, several indicators of a recession have emerged. For example, as reported by Finbold, there is a troubling trend in the labor market, with permanent job losses accelerating aggressively. Historically, significant spikes in permanent job losses have consistently preceded recessions since 1995.
