How to forecast a recession

IMAGINE you are sailing a ship through dense fog, looking out for land. Your lookout spots species of birds typically found offshore. It now seems likely that you are approaching land, but it is impossible to know for sure until you see the coastline. If a US recession is land, the “birds” are already swooping into view. But these sightings offer no guarantees of what lies ahead, only probabilities.

An inverted yield curve, when the long-term interest rate falls to or below the short-term rate, is commonly considered to be a predictor of recession.

The ten-year bond rate did fall below the three-month Treasury rate in March, though the two are now at about the same level. In any case, the yield curve does not actually tell us much. It simply reflects financial-market expectations that the US Federal Reserve might cut short-term interest rates in the future, which in turn reflects expectations that economic activity might falter.