Richard Drew / AP
Tegn points to an upcoming US recession, according to an economic indicator that has gone before any recession over the past five decades.
It is known by economists and Wall Street dealers as a "yield curve inversion" and it refers to when long-term interest rates fall below short-term rates.
This curve has flattened out and sloped down for more than a year, raising concerns among some analysts that an economic downturn is threatening.
But on Sunday, an inauspicious milestone was achieved: The yield curve remained inverted for three months, or a whole quarter, which for half a century has been a clear signal that the economy is heading for recession in the next nine to 18 months, according to Campbell Harvey, a finance doctor at Duke University who spoke to NPR on Sunday. His research in the mid-1980s was first linked to dividend curve inversions.
"It has been linked to anticipating a recession for the last seven setbacks," Harvey said. "From the 1960s, this indicator has been reliable in predicting a recession, and more importantly, it has not yet given any false signals."
Nevertheless, many economic assumptions do not see a recession on the horizon.
For example, Randal Quarles, Federal Reserve Deputy Banking Supervisor, said that the gap between short-term and long-term interest rates does not mean the US is moving towards a recession.
And then there is a wealth of bright economic news that hits the background of the yield curve inversion that hit three months: unemployment is near historic low, the stock market is going strong. S & P 500 is up 17% for the year. And while some economists say the rate of growth may slow down, the consensus view is that a dramatic economic downturn is not on the horizon.
But Harvey says no single economic predictions have the impressive prescient track record of the yield curve inversion.
"Yes, the economy looks good right now," Harvey said. "But the yield curve is about the future," he said. "It captures the expectations of the broad market as to what can happen in the future."
Can a whole quarter of a reverse yield curve become a self-fulfilling prophecy?
"Maybe", Harvey said.
Consumers could see the data point as a red flag and withdraw on expenses, or companies can see the sloping yield curve and decide not to invest or hire new employees.
"I look at it more in terms of risk management. This is an important part of the information. It helps people plan," Harvey said. "It increases the possibility that we have a soft landing, not a hard landing, as a global financial crisis."
If the idea of a reverse yield curve is difficult to understand, Harvey says to think of a bank deposit certificate, better known as a CD.
"If you lock up your money for five years, you expect to get a higher interest rate than, for example, unlock for six months," he said. "But in some rare situations it is backwards and it turns out that the long-term interest rate is lower than short-term interest rates, and it's called a reverse rate curve, that's exactly the situation we have now, and it's a harbinger of bad news." 19659028]