The esteemed creator of the market's most notable recession predictor maintains a firm belief in the accuracy of the inverted yield curve, signaling a potential economic deceleration in 2024.
Despite Wall Street's optimistic projections of a soft landing in 2024, this economic expert, who brought the yield curve to prominence, anticipates a downturn within the year.
Campbell Harvey, a Canadian economist and Duke University researcher, demonstrated through his research that an inverted yield curve, where short-term Treasury yields surpass long-term government bond yields, has historically foretold a US recession. This indicator, with a flawless track record dating back to 1968, has accurately predicted economic downturns eight times without any false alarms.
Speaking on the Forward Guidance podcast, Harvey highlighted that the yield curve inversion in late 2022 points to a recession likely occurring in the early or mid-2024. Initially, Harvey had considered the possibility that the indicator might fail this time, considering robust labor market data and other positive economic indicators. However, he has since revised this view, acknowledging the unlikelihood of avoiding a recession, especially in light of the Federal Reserve's aggressive rate hikes.
The Federal Reserve's decision to raise rates 11 times during the 2022-2023 cycle, elevating its benchmark rate from near zero to between 5.25% and 5.50%, has significantly influenced Harvey's revised opinion. He now foresees a pronounced slowdown in growth for 2024.
Harvey notes that the inverted yield curve also acts as a self-fulfilling prophecy. It signals to companies and investors the impending economic slowdown, influencing their spending and business behaviors, and thereby reducing economic activity. This causal relationship between the yield curve and economic outcomes differs from past instances.
Moreover, it's important to note that the yield curve's inversion is not the ultimate indicator of a recession. Experts observe that the de-inversion of the curve, when long-term yields again rise above short-term bonds, is the actual signal of a downturn's onset.
Harvey emphasizes that the yield curve's unblemished predictive history currently aids firms in making more informed decisions in the present economic climate, encouraging prudence. He notes that unlike the 2008 global financial crisis, companies are now more strategically focused on risk management, which may help in mitigating severe layoffs.
However, Harvey acknowledges the possibility that this indicator might eventually lose its predictive power, but he believes that moment has not yet arrived.
