Written by Roger Lee, Vice President, Business Client Advisor
There are several points of data to help accurately forecast a change in the business cycle. One of the most reliable has historically been an inverted yield curve – when short-term debt instruments have higher yields than their long-term counterparts. Since 1955, an inverted yield curve has foreshadowed all ten recessions, with one false positive in the mid-1960s. The current yield curve has been inverted since October 2022, when 3-month rates rose above 10-year treasury bonds. There is some debate as to why the curve has been such a dependable indicator of economic downturn – with experts hypothesizing that monetary policy pressure to raise interest rates is a cause-and-effect trigger leading to future lower economic output.
According to data compiled by Visual Capitalist and published Oct. 10, a recession in 2024 had the following probabilities according to Fed Staff – 0%, yield curve – 61%, economists – 48%, consumers – 69%, Goldman Sachs – 15%, and CEOS -84%. With that divergence in opinion, someone is wrong!
It’s not that surprising to have such different views on the future. The economy is comprised of a myriad of markets, industry sectors, and incredibly complex inputs. As a result, other leading indicators (thousands, actually!) are essential, including U.S. and Global Industrial Production, U.S. Purchasing Managers Index (PMI), Total Industry Capacity Utilization Rate, Housing Starts, U.S. Business Confidence, etc. Each indicator has a unique lead time in which current data predicts future economic trends. And these are all based on what has happened in the past, exact conditions that may not be the same today.
Indicators with a shorter lead time are typically less helpful because there is less time to react. Similarly, an arrow with a longer lead time but lower accuracy is also less helpful because the probability of being right could equal being wrong. For example, for industrial production, the US PMI leads the industrial economy by nine months and correctly forecasts about 81% of the time, while the Small Business Optimism Index shows by just six months and with 70% accuracy. There are also proprietary composite indices comprising a bundle of weighted indicators, including those produced by The Conference Board, JP Morgan, and Wilshire Market Cap. Are you confused yet?
The New Hampshire-based Institute for Trend Research Economics (ITR) is one of the nation’s most accurate economic forecasting groups. It’s been around since the 1940s and has a 94+% accuracy record in forecasting the economy 4-12 quarters in the future. It tracks over 10,000 indicators and 200 industries and developed its leading indicators around financial markets, retail sales, and the overall economy.
While the current inverted yield curve is nearing its first anniversary – pointing to an official multi-quarter decline in GDP – ITR is forecasting an atypical economic downturn in 2024 that officially would not be considered a recession. ITR calls for two-quarters of GDP decline, but not back to back. Also referred to by economists as a “soft landing,” ITR and a growing list of prominent economic forecast groups are saying that the lumpy, bumpy national economy next year is expected to give way to a rebound in 2025 for another growth period in the business cycle well into 2027.
Because the macro economy comprises many different and disparate industries, there are winners and losers by sector in economic expansion and contraction. That is to say that businesses in some industries will feel more economic softening in the year ahead than others. Additionally, economic conditions across the country are not homogeneous – fast-growing places like Central Oregon could weather a downturn with little impact, just as it did with the dot.com bust in 2000-2001. More on how our tri-county economy might fare later…
Rather than focus on reacting to what the 2024 “soft landing” will bring, we are advising clients to dedicate more time and energy to how they will prepare and capitalize on the period of economic expansion that is forecasted to follow – knowing that there is a mountain of data and research behind that advice.