Economic downturns usually come as a surprise.
, a finance professor at Duke University. But it’s not a guarantee, since an inverted yield curve doesn’t itself cause a recession. Instead, it’s a reflection of how investors feel about the economy’s future — and those feelings could be off-base. Other economists, like Sinclair, also said they’re not sure yet what the inverted yield curve means — and Harvey added that although it has a good predictive track record, it’s just one signal in a complex economic landscape.
Even if the inverted yield curve proves prescient and a downturn does come, we don’t have a good way to pinpoint when it will hit. According to Harvey, recessions have followed inverted yield curves by anywhere between six and 22 months. That’s not a small range, especially in political terms — it’s the difference between an economic slowdown that begins just before the Iowa caucuses and a recession that starts five months after the next presidential inauguration.
And in the meantime, consumers, investors and policymakers will all keep doing things that affect the economy. It’s possible that theabout an impending recession could become self-fulfilling if everyday people respond by saving their money instead of spending it. Or maybe the opposite will happen, and smart policy responses to early warning signals could ward off a recession or make it less damaging.
Either way, the unpredictability of human behavior will frustrate anyone trying to pin down exactly when a recession will arrive. That doesn’t mean economists should stop making forecasts or that signals like the inverted yield curve aren’t useful. But anyone looking at predictions about when the next recession will land should take those forecasts with a big grain of salt.
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