Rule No. 1 of analyzing the economy 
Don’t count on the signal of a single metric.
That’s rule No. 1 of analyzing the economy using data.
Economic forecasters over-indexing to metrics like the yield curve and the Conference Board’s Leading Economic Index have learned this lesson the hard way: These once reliable predictors of recessions have failed to do so in recent years.
I bring this up today because The Wall Street Journal just published a big feature on the yield curve titled, “Wall Street’s Favorite Recession Indicator Is in a Slump of Its Own.“ The title speaks for itself.
In a nutshell, this indicator has been based on the notion that the economy is functioning normally when long-term interest rates are higher than short-term interest rates, a phenomenon that’s also referred to as an upward-sloping yield curve. When the yield curve inverts (i.e., when long-term interest rates are lower than short-term interest rates), the economy is thought to be malfunctioning. Historically, yield curve inversions have a pretty good track record of preceding recessions.
The inverted yield curve has been predicting a recession that has yet to come. (Source: The Wall Street Journal)
But nothing is ever certain.
And in the current economic cycle, the yield curve — which has been inverted for two years — has been predicting a recession that hasn’t come and doesn’t seem to be coming anytime soon.
The other metrics may tell a different story
My favorite part of the Journal’s feature was this quote from Duke University finance professor Campbell Harvey, who popularized the link between inverted yield curves and recessions:
“It is naive to think that you can just forecast the complex U.S. economy with a single measure from the bond market.”
Harvey nails it.
This article was originally published by a www.tker.co
Read it HERE
