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If there is wisdom in crowds, investors should be worried about the US economy
August 29, 2019

Is the US heading for recession? President Trump thinks not, and most economists agree: a recent survey by the Philadelphia Fed found that the average forecaster expects only a very modest slowdown over the next 12 months, and that unemployment will actually continue to fall.

But this is not as comforting as we’d like. The IMF’s Prakash Loungani has pointed out that economic forecasters around the world have consistently failed to foresee downturns – their failure to predict the 2008 crisis merely continued a longstanding pattern. The fact that economists don’t expect a recession therefore tells us little about the chances of one.

Instead, John Williams – now a member of the rate-setting Federal Open Market Committee (FOMC) – has pointed out that a better forecaster of recession is the shape of the yield curve. With 10-year Treasury yields well below shorter-dated ones, this now points to a significant risk of recession. The New York Federal Reserve Bank estimates that the curve points to an almost one in three chance of one within the next 12 months. There’s a simple reason for this. An inverted yield curve is a sign that investors expect interest rates to fall, which means they expect a weak economy – and these expectations have often been correct.

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