“As sure as the spring and winter follow each other, prosperity, economic growth and recession follow one another too”
A recession is when an economy significantly declines for at least six months or more. Many experts say that a recession is when the GDP growth rate is negative for at least two consecutive quarters.
A recession can quietly begin before the quarterly GDP reports are even out. That’s why the National Bureau of Economic Research measures four factors which are: employment, income, retail sales and manufacturing.
What economic indicators tell us
The year ahead is alarming as well. Are we headed for a recession in 2020? Things are turning out to be worse in the global economy. Financial markets are blinking warning signs and the global economy is weakening day by day as the US China trade war gets more intense.
Recently, a realignment in interest rates intensified those worries as the yield on the 10 year US Treasury note – which is a benchmark, fell below the yield on the 2 year Treasury note for the first time since 2007.
In a normal scenario, investors earn higher interest rates on long term bonds than short term bonds as these people lend to the government so when the equation reverses itself, economics call it an ‘inverted yield curve’.
The inverted yield curve suggests that investors expect growth to slow so much that the FED (Federal Reserve) will soon feel bound to slash short term rates to try to bolster the economy. Inverted curves are harbingers of recessions as they have occurred before each of the past five downturns.
What experts believe
Due to inversion stock plunged badly as the Dow Jones tumbled by 800 points, or 3%. And in addition to that, many economists worry that odds of the recession are rising. Julia Coronado, chief economist at MacroPolicy Perspectives predicts a 40% probability of a downturn within the next 12 months, up from 28% last month.
Those concerns have come into existence partly due to the US-China trade war, which has discouraged a lot of businesses from expanding and investing in new equipment and buildings. It has a negative spillover effect over Germany’s export led economy which nosedived in the second quarter. A disordered Brexit from the EU looms this fall and Japan & South Korea are also engaged in a trade fight.
Also, the Trump administration has essentially acknowledged that its planned 10% tariffs on $300 billion of consumer goods from China would hurt U.S. shoppers. That’s because many retailers would raise prices to account for the higher tariffs on Chinese imports they would have to pay.
As for now, most economic signs appear in good shape and look solid. Employers are adding jobs at a steady pace, the unemployment rate remains near a 50-year low and consumers are optimistic.
“I wouldn’t forecast a recession in 2020 just on the yield curve,” said Eric Winograd, senior economist at Alliance Bernstein. “I would want to see other signals that point to that, but we’re not seeing them right now.”
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