In recent months, there has been a notable absence of discourse surrounding the prospect of a recession. The prevailing discussions among economists and financial analysts now revolve around whether we will experience a soft landing or no landing at all. The notion of a hard landing seems to have fallen out of favour. However, it is premature to entirely dismiss the possibility of a recession.
Admittedly, one can always cherry-pick a handful of macroeconomic indicators—there is an abundance of them—to support a recessionary argument. But there is a more straightforward rationale for not discounting the probability of a recession: time.
The table below illustrates the number of months between the initial inversion of the US yield curve and the confirmation of a recession by the National Bureau of Economic Research (NBER). To sidestep the perennial debate over which yield curve is the most telling, I consider both the 10-year versus 2-year and the 10-year versus 3-month yield curves.
The data reveals that, on average, it took 18 and 19 months respectively for a recession to occur post-inversion. The median duration is 16 and 19 months respectively. Notably, there are instances where the onset of a recession took significantly longer.
Translating this to our current context, we are approximately 20 and 26 months past the first inversion for the 10-year versus 3-month and 10-year versus 2-year yield curves respectively. Thus, in the case of the 10-year versus 3-month yield curve, we remain within the historical window where a recession has typically manifested. For the 10-year versus 2-year yield curve, we are just over seven months beyond the median duration, which is not excessively out of range.
The inherent challenge with predicting recessions is their infrequency, which precludes drawing conclusions with high certainty. Nonetheless, the historical data suggests that a hard landing remains within the realm of possibility.
Potential triggers
In my view, there are two primary candidates that could precipitate a recession. The first is a substantial weakening of the labour market, leading to a decline in consumer spending. Here again, time is a crucial factor. Historically, it takes about two years after the commencement of a Federal Reserve tightening cycle for such effects to materialise. We are now just over two years into this cycle, and unemployment is beginning to inch upwards.
The second potential trigger is a credit event. Rapidly rising interest rates have a history of causing disruptions. US regional banks have shown signs of strain, and issues in the commercial real estate sector could yet unveil further problems.
Jeroen Blokland is founder and manager of the Blokland Smart Multi-Asset Fund and the True Insights platform, which offers independent multi-asset investment research. Formerly, he served as the head of multi-assets at Robeco. His chart of the week is featured every Thursday on Investment Officer. His column originally is published in Dutch on investmentofficer.nl.