Off the Charts
Double Warning That a Recession May Be on the Way
By FLOYD NORRIS
Published: September 15, 2007
THE employment statistics and the bond market are combining to send out a warning that has been heard only rarely in the past two decades: A recession is coming in the United States.
Bonds and Employment The two charts show the double warning. Both charts warned of an economic downturn before the 1990 and 2001 recessions, and they are doing so again.
While each has arguably registered false warnings, they have never done so together.
The first chart shows the difference between the yield on two-year Treasuries and the Federal Reserve’s target rate for federal funds — the rate on loans between banks. In normal times, the Treasury rate is usually higher.
In bond market jargon, the opposite condition is an inverted yield curve. And when it is very inverted, the recession warning is sent.
At the widest spread this week, on Monday, the yield on two-year Treasuries was down to 3.854 percent, while the fed funds target rate was 5.25 percent. That difference, of 1.396 percentage points, is the largest since early January 2001.
It was also in January 2001 that the Fed surprised the market with a 50-basis-point — or half a percentage point — reduction in the target rate for fed funds. That move briefly cheered the stock market, but did not prevent the recession that began in March.
The second chart shows the six-month changes in the number of people with jobs, as reported by the Labor Department’s household survey. In a growing economy, with the labor age population rising, the number of jobs almost always increases.
But not now. The August employment figures, reported last week, showed 145,794,000 people with jobs, or 125,000 fewer than in February. When that number goes into negative territory, it is a warning of a slowdown.
As can be seen from the chart, the job warning was sent out in July 1990, the month in which the recession began. A warning of the 2001 recession arrived in July 2000, but few took it seriously.
To be sure, there have been just two recessions in two decades, which is not enough to validate any set of forecast tools. But if one arrives, there will be criticism that the Federal Reserve was too slow to cut interest rates as it ignored the threat of an inverted yield curve, and that it focused on inflation for too long.
“With the core inflation rate comfortably close to 2 percent, and the Treasury market begging for ease for over a year, if it turns out to be a recession, it will also be a policy error,” said Robert Barbera, chief economist of ITG.
As the charts show, sometimes one indicator or the other has seemed weak when no recession followed. The job number looked bad in 1995, but there was no confirmation from the interest rate indicator.
Similarly, in 1998 the interest rate indicator came close to sounding a warning amid the fears brought on by the rescue of a large hedge fund, Long-Term Capital Management.
But the difference between the rates never quite reached 1.3 percentage points, and in any case the employment figures remained strong.
Now both look weak. That is no guarantee of a recession, but it may help to explain why the Fed is expected to change course and reduce the federal funds rate next week.
nytimes.com |
