Are We In A Recession Already?
Published September 17th, 2007 in Fixed Income, Economy Tags: federal reserve, fed rate, inflation rate, interest rate, NY Times, recession, treasury market, treasury rate.What if we are already in a recession? That is the question this article from the NY Times raised over the weekend.
Of course, this is an unanswerable riddle since the only way we know how to identify a recession is through hindsight, when it ceases to matter.
“With the core inflation rate comfortably close to 2 percent, and the Treasury market begging for ease for over a year, if it turns out to be a recession, it will also be a policy error,” said Robert Barbera, chief economist of ITG.
Amen. I’ve been saying this for a while: Bond Market Screaming For Rate Cut - Fed Listening?
But what if there was a reliable way to know ahead of time? The article showcases two variables and demonstrates how in the past they have given accurate signs of an imminent recession:
The first chart shows the difference between the yield on two-year Treasuries and the Federal Reserve’s target rate for federal funds — the rate on loans between banks. In normal times, the Treasury rate is usually higher.
The second chart shows the six-month changes in the number of people with jobs, as reported by the Labor Department’s household survey. In a growing economy, with the labor age population rising, the number of jobs almost always increases.
Click to Enlarge Graph:
federal reserve, fed rate, inflation rate, interest rate, NY Times, recession, treasury market, treasury rate
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5 Responses to “Are We In A Recession Already?”
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I think the chances of a recession have risen greatly in the past month or two. The Fed must do something to stop the recession pressures. Inflationary pressures seems to always be a key to them, which is great, but they must do everything possible to avoid a recession. The fixed-income markets are certainly screaming for rate cuts.
This might be of help.
Is a Recession Imminent?
FRBSF Economic Letter
2006-32; November 24, 2006
The Yield Curve and Predicting Recessions
Jonathan H. Wright
2006-7
Quoting the first one:
“Finally, not only are recessions hard to predict, it is even hard to tell that the economy is in a recession once it has begun. This is especially true in the low volatility regime that has prevailed since the mid-1980s. Here, the evidence suggests that it may be useful to supplement data from the surveys with data from indicator models that attempt to measure the current state of the economy”.
This said, an analyst here in Spain has found the chances of U.S. recession to be 27-30% using Wright’s model, between 25-40% across several models. Not very high, but is not negligible. The ECRI data seems to be quite reliable and points to slow down, but still not recession.
Aaron, how about a 50 bp cut? that’d wake people up, eh?
Bourne, thanks for the links!
btw, your English is too good. Are you an expat or local?
Really?
Well, I’m a local, just studied english until secondary school and then read quite a lot by myself. I think it is a good approach to a foreign language, working better if you read things of interest to you.
Now, about a 50 rate cut, I have these numbers:
Date, Dow Jones that day and several days after, and some remarks:
——————-
Sep 11th 9441 to 9591 … 10.000.
Oct 2nd 2001 8840 to 8950 … 9500.
May 15th 2001. in four days 10.800 to almost 11.350.
Mar 20th 2001. Here the Dow slipped several days.
Jan 31st 2001 10.800 to over 11.200 in several days.
* It seems to work in the short term, about 400-600 dow points up.
* It is not a guarantee for a trend.
* As a colleague pointed to me yesterday, these examples were surprise, between-meetings rate cuts. Now the market could have priced half of the effect yet.
* Also, the Fed could very well cut 25 and talk about future cuts whenever necessary and watching the macro data.
Well, let’s wait and see.
So what is all this talk about recession? Maybe we are, maybe we ain’t in one.
I’m only interested in how one can prosper from this knowledge.
I do believe we are in a recession (in the American market at least).
Have a great day!