by Len Kiefer


he current economic expan- sion is set to complete its

good. The unemployment rate as of March 2019 sits at 3.8 percent, a very low level by historical stan- dards. However, the unemployment rate is a poor predictor of future economic activity. The average num- ber of months between the cyclical low of the unemployment rate and the start of the next recession is seven months. WARNING SIGNS Financial market indicators, which move faster than economic data, have pointed to a deteriora- tion in growth prospects. The yield curve slope, or the spread between long-maturity bonds like the 10- year Treasury and shorter matur- ities such as the two-year Treasury, has flattened substantially in recent

months. When this measure of the yield curve slope inverts, a reces- sion almost always follows. The slope, as measured by the difference between the 10-year and two-year Treasury for April 12, was at just 16 basis points. Not invert- ed, but close. If you stick this yield curve metric into a simple proba- bilistic model of recession over the next 12 months, the implied proba- bility of a recession starting over the next year is about one in five. That’s up from an implied probability of about one in six a few months ago. Why might the yield curve invert? One key factor driving the slope of the yield curve is the likelihood of future monetary policy actions. Since late last year when finan- cial markets expected further rate hikes in 2019, expectations have

tenth year this fall, surpassing the 120-month expansion of the 1990s for the longest in U.S. history, dating back to the mid-1800s. However, despite a low unemployment rate and robust job growth, several for- ward-looking indicators have started flashing warning signs causing the outlook from my peers in the eco- nomics profession to turn negative. In a survey earlier this year for the National Association for Business Economics (NABE), two in three economists surveyed expected that the next U.S. recession would begin by 2021 (though not me for reasons discussed below). Despite the potential warning signs and negative sentiment among my peers, the economy looks pretty

70 | think realty housing news report :: june / july 2019

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