Do Economic Indicators Still Matter?

Do inverted yield curves and low job creation numbers still signal recession?
June 21, 2019 Updated: June 23, 2019

What’s going on with the U.S. economy? Are we seeing the signs of a recession in 2020?

Or are left-wing economists and political candidates simply trying to jawbone the economy into negative territory?

Two statistics that normally foreshadow a recession have recently shown up, triggering warnings that one may be just around the corner. Specifically, inverted bond yield curves and falling job-creation numbers have some economic observers predicting a slowdown, if not recession, for the U.S. economy in the near future.

Are they right? Do these two statistical indicators always point to a recession on the horizon? The answer is best couched in economic terms: It depends. In other words, as in most things in life, and certainly in economics, context matters.

What’s an Inverted Yield Curve?

First, an inverted yield curve is when long-term bond yields fall below short-term bond yields. Normally, the longer investors tie up their money in a bond, the higher the yield on their investment. Conversely, the shorter the term of the bond or note, the lower the yield. When short-term bond yields are higher than long-term yields, it’s called an inverted yield curve.

An inverted yield curve can happen when investors become worried about the near-term condition of the economy, and in particular, the stock market. This negative sentiment prompts investors to flee stocks for the relative safety of U.S. Treasury bonds. The last major event when this happened to a great degree was the financial crisis of 2008 to 2009.

What’s Behind Inverted Yield Curve?

But not all inverted bond yield curves are the same. There are different causes for their occurrences and sometimes little or no meaning or effect from them. In fact, over the past couple of decades, there have been several that weren’t followed by a recession.

It turns out that there can be more than one phenomenon expressed by the inversion.

For example, which side of the equation is driving the recent yield curve inversion—the short-term bond or the long-term one? More to the point, is the yield inversion a function of rising demand for the long bond, which then causes bond prices to rise and yields to fall, due to recession concerns?

Or is it a result of the short-term yield rising in response to the two years of rising short-term rates set by the Federal Reserve? Sometimes, capital markets can influence short-term interest rates, but mostly, it’s the Fed that determines short-term rates through its interest rate policies, hence the relatively high short-term rates.

But now, the Federal Reserve is backtracking on further rate increases widely expected early in the year. Investors read that as an indication that the Fed will be lowering short-term rates sometime this year.

If the Fed indeed lowers short-term rates, investors want to hold higher interest long-term bonds, driving the price up and the yield downward. Hence, the relatively low rate on the long bond.  Are some of those buyers concerned about slower growth? Certainly. But it’s just as probable that many only wanted to earn a bit more in their fixed-income accounts before the Fed actually starts reducing short-term rates.

Low Job Numbers Are Bad News?

May’s job creation statistics were, to put it mildly, a massive disappointment to many pundits and opinion-makers. Last month saw only 75,000 non-farm jobs created, about 100,000 less than what economists expected. Surely, this bodes poorly for the economy, right?

Not necessarily. Every economy, weak or strong, has good or bad months for job creation and other indicators. And with the U.S. unemployment level at a 50-year low, it seems irresponsible to conclude that a downturn is just over the horizon. Even Jason Furman, economic adviser to former President Barack Obama, pointed out that as the country approached full employment, fewer jobs would be filled. There just aren’t enough workers to go around. That’s what we’re seeing now.

In fact, the U.S. unemployment rate could even go lower. As the U.S.–China trade war continues, some of the manufacturing jobs lost to China in the past may return to America.

Regardless, consumer spending continues to remain strong.

Another huge factor yet to be counted is the probability that some form of an infrastructure bill will be passed by Congress and signed by Trump before 2020. Spending would potentially be in the $2 trillion range and would be a huge driver of job creation. That will not only drive unemployment down even lower, but also help push wages higher.

This is why context really matters. Sometimes, both inverted yield curves and a low job creation number can and do indicate that an economic downturn is headed our way. In other times, they don’t. Looking at the broader situation, and not just what’s politically desirable for one side or the other, provides a much clearer and more accurate picture of where the economy is going. So far, that picture is still positive.

James Gorrie is a writer based in Texas. He is the author of “The China Crisis.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

James Gorrie
James Gorrie
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, He is based in Southern California.