Investing.com - The Federal Reserve, President Biden and Wall Street continue to maintain that the US economy is not in danger of recession. Anyone who says otherwise is seen as a doomsayer who is deliberately conjuring up doom.
Jim Reid of Deutsche Bank (ETR:DBKGn) is one of the rare pundits who doubts the soft-landing story because there are four facts that all point to a recession and cannot be swept under the carpet.
The expert, together with other analysts, took a close look at the economic downturns that have taken place since 1854. The focus was not only on inflation but also on yields, interest rates and oil prices.
Each of these four factors showed certain conspicuous features in connection with a recession over the past almost 170 years. Worryingly, they are all currently pointing to a recession.
1. Inflation
The experts noted that the US economy has historically been very sensitive to inflation of 3 per cent or more over a 24-month period.
This mark has already been breached, as the last time the consumer price index was below 3 per cent was in April 2021. The analysts determined that each time this criterion was met, a recession followed with a 77 per cent probability.
The current decline from the 40-year high of 9.1 per cent does not play a role in this analysis. There can also be a longer period of time between the initial inflation shock and the subsequent recession.
Moreover, it does not look as if inflation will reach the Fed's target of 2 per cent any time soon, as the inflation rate has already risen again in August and September.
2. Yields
The situation is similar for yields. Normally, yields on ten-year government bonds are lower than those on 30-year paper. If this changes, experts speak of an inversion of the yield curve.
This means that the market expects the situation to worsen on a 10-year horizon.
This is exactly what has happened since July 2022. Whenever this phenomenon occurred in the past, it was followed by an economic downturn 74 per cent of the time.
3. Key Interest Rate
Interest rates also play an important role in the run-up to a recession. This is because the central bank uses the key interest rate to either stimulate the economy or cool it down.
The latter is achieved by raising interest rates, because when loans become more expensive, less is invested and economic output declines.
Since 1854, whenever the central bank has raised interest rates by more than 2.5 percent over a 24-month period, a recession has followed with a probability of 69 percent.
In the current case, the Fed raised rates by more than 5 per cent in just 18 months.
4. Oil price
How well a country's economy is doing also depends on how high energy prices are. The more expensive, the poorer the outlook, because either margins fall or demand collapses due to rising prices.
Thus, the oil price is another good indicator of economic health.
Jim Reid's analysts found that when the price of oil had risen by at least 25 per cent in a 12-month period, a recession occurred 45.9 per cent of the time over the past 170 years. The current rise in oil prices is thus a clear warning signal, as it has gone up by around 33 percent since June.
Translated from German using DeepL.