The Atlanta Federal Reserve on March 3 has again issued its GDP Now projection, finding the U.S. economy could be contracting at an inflation-adjusted, annualized 2.8 percent rate for the first quarter of 2025. That is down further from its Feb. 28 projection of negative 1.5 percent.
But this was a long time coming, with red lights flashing since 2022 as inflation overheated the U.S. economy amid a slowdown of global production following Covid and trillions of dollars of monetary and fiscal stimulus.
One such reliable recession measure, the spread between 10-year treasuries and 2-year treasuries, has shown inversions — the 10-year interest rate goes lower than the 2-year rate and then stays there for a period of time as investors begin hedging against risk by locking higher long term rates — in each of the last six recessions.
In 1978, the 10-year, 2-year spread inverted, foretelling the 1980 recession, in 1980 predicting the 1981-1982 recession, in 1989 before the 1990-1991 recession, in 2000 before the 2001 recession, in 2006 before the 2008-2009 recession and even in 2019 before the 2020 Covid recession. It’s like clockwork.
Sometimes there’s a head-fake, for example, a brief inversion in 1998 did not result in a recession before another deeper inversion began in 2000 prior to the 2001 recession. But more or less, when recessions do occur, they were always preceded by such an inversion. Every single time.
It works with the 10-year, 1-year spread between treasuries, too, a longer dataset predicting all of the above recessions plus the 1969-1970 recession and the 1973-1975 recession.
And in every single recession, there was always a run up in inflation that coincided with the inversions, which reached its peak as the economy overheated and then began dipping as unemployment rose.
Similarly, as the spread between the 10-year and either the 2-year or 1-year treasuries uninverted, unemployment rose, too. Every single time.
So, where are we in the process? Well, the 10-year, 2-year and the 10-year, 1-year both inverted in July 2022. When the 10-year, 2-year spread inverts, a recession tends to result on average 14 months afterward, sometimes sooner, sometimes later. The inversion is the prediction, and then the narrowing and inevitable uninversion are when the pain is felt.
On that count, the 10-year, 2-year inversion peaked at -1.07 percent in March 2023 and -1.08 percent in July 2023. Well, since Dec. 2022, overall unemployment increased 1.1 million to 6.8 million by Jan. 2025 as President Donald Trump was being sworn into office. Similarly, the unemployment rate rose from a low of 3.4 percent in April 2023 to 4.0 percent now.
Which, by the way, is what the American people were saying in poll after poll the entire time former President Joe Biden was in office: The economy stinks. It predicted the outcome of the 2024 election, with President Donald Trump winning over Vice President Kamala Harris and Biden being a one-term president.
The good news is that in each of the recessions on record, inflation went down significantly as demand slowed down either leading up to, during or after the recession. Every single time.
Politically, when a recession occurs or is already occurring at the beginning of a new administration, voters tend to blame the prior administration’s party. For example, Franklin Roosevelt, although the Great Depression continued during his tenure of office, was easily reelected in 1936. Same with Richard Nixon, who had a recession as he came into office, but was easily reelected in 1972. And Ronald Reagan, who also had a recession the first year, and was easily reelected in 1984. And Barack Obama, who had a recession ongoing when he came into office, and was easily reelected in 2012.
Of course, the history lesson will not prevent any contemporaneous partisan hand-wringing and finger-pointing, but it might just provide some much-needed context. Recessions are highly cyclical, they are not born overnight, and they often have many fathers. In this case, it appears President Trump inherited former President Biden’s recession that was going to happen anyway.
Robert Romano is the Vice President of Public Policy at Americans for Limited Government Foundation.
Reproduced with permission. Original here: U.S. Recession Signals Have Been Flashing Red Since 2022, Don’t Be Surprised When It Happens
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