Since the passage of Barack Obama’s economic stimulus package, the nation has enjoyed nearly 10 years of uninterrupted growth. That’s 104 months of increasing job numbers. In just one month, that economic expansion will be the longest since World War II. All of that is fantastic.
But no matter what some people would like to believe, there’s no reason to think that the economy has left behind the cyclical nature that has held since records started being kept. So it shouldn’t be surprising to find that—especially with Donald Trump doing everything possible to generate instability—there are some very grayish clouds on the horizon.
One of those clouds was the Friday jobs report. The 75,000 new jobs created in May undershot expert predictions by more than 100,000. And with that poor number came re-estimates for March and April that actually cut 75,000 jobs from the totals for those two months. So the whole thing was kind of a wash. The stock markets have not so far reacted negatively to this news because they expect there to be a sort of gift in bad numbers. With a weakening job market, analysts are predicting that the Federal Reserve will “pivot” and begin easing monetary policy, meaning cutting interest rates for cash. That won’t help the people looking for better jobs, or do anything to help the anemic income growth that was part of the same report, but it will benefit CEOs and hedge fund managers so … stocks go up.
However, that’s just gray cloud No. 1. The bigger, more ominous cloud is found over the bond market, about which Bloomberg reports that Thursday marked 10 straight days in which the yield curve was inverted. That may not sound like anything other than financial babble. What it means is that short-term bonds are paying a higher interest rate than longer-term bonds—because the people that set those rates are betting that things over the next few years are going to be worse than they are in the next few months.
Not that things in the short term aren’t going to be pretty good … for about another 10 months.
A bond yield inversion is never a good thing, but it’s not an absolute signal of coming recession. The yield went upside down for a few days back in March, but things appeared to right themselves soon after. But having the yield upside down for 10 straight days is double-plus bad. According to Bloomberg, “On average, it has taken 311 days for the economy to begin contracting after the curve had been inverted for at least 10 days.” And the longer the rate remains inverted, the more it signals a severe, or prolonged, downturn.
However, it’s not a sure thing. Some investors are putting the current inversion off as a fluke, as literally a sign that the economy is going to be so, so good in the short term that people are wanting to buy in right now. And pay more for it. The evidence for this is … well, it’s never happened before, so it’s not sure what the evidence would look like.
That bond rate inversion is another reason why the next Fed meeting is likely to end with an announcement that rates are being cut. And with both jobs and bonds pointing the wrong way, that cut may not be the cautious one-quarter-percent change the managers have been making. If things don’t turn around, expect more of the same at the following Fed meeting.
There are other signs of things turning down as well. On Monday, the Manufacturing Index Report fell to its lowest levels since 2016. The immediate suspect for this was supply-chain disruptions caused by Trump’s tariffs on China, but even if that’s the case, there’s no guarantee of a quick recovery. And it’s not just manufacturing that’s raising alarms: Commodity prices for copper and lumber are taking a tumble. That’s a scary sign of what’s happening for big, long-term projects.
If a recession follows the normal pattern, it could come along in the second or third quarter of 2020. That might seem like an optimal time for punting Trump out the door on Election Day. But it’s not clear that a single quarter of recession would have any immediate, visceral effect that would undercut the way-too-widely held belief that Trump has been good for the economy. And 310 days after an inversion is just an average time between when the economy starts turning sour and when it’s officially in recession.
The official declaration could easily come after Election Day. That’s especially true given that Trump might decide to goose the numbers a bit by ending his tariffs, or promising another round of giveaways for corporations. And when it’s all over, it’s entirely possible that we could slide into recession with absolutely no slack in the system. With the Fed rate already at zero. With Trump already having chopped corporate tax rates to an unsustainable degree. With the Republicans already burying the Treasury in record debt. With trade relations in tatters and the biggest buyer of U.S. treasuries alienated.
Obama steered the nation out of the Bush recession. Who is going to take the wheel to save us this time? Oh, and on Friday, the bond yield continues to be upside down, with three-month bonds paying more than two-year, or five-year, or even 10-year bonds. The market isn’t just calling for a recession; it’s predicting a bad one.