The economist who introduced the inverted yield curve as a recession predictor has forecasted a slowdown for the U.S. economy in 2024.
What Happened: Campbell Harvey, a Canadian economist and researcher at Duke University, has indicated that the U.S. economy is likely to experience a downturn this year, reported Business Insider on Friday.
Harvey’s work has shown that an inverted yield curve, where short-term Treasury yields exceed the yield on longer-term government bonds, has historically preceded a U.S. recession. This indicator has been accurate in predicting all eight recessions since 1968.
Despite his earlier optimism due to strong labor market conditions and positive economic data, Harvey now predicts a recession in the first or second quarter of 2024, following the yield curve inversion in the fall of 2022.
“I had some credibility in saying ‘my model could be wrong’ because it’s my model,” Harvey said.
“Essentially I was saying it might be possible to dodge a recession, but this was really contingent on the Fed standing down — and this is one year ago — so standing down and not hiking rates any further. And that is not what happened.”
He attributed this shift in outlook to the Federal Reserve’s decision to raise rates 11 times during the 2022-2023 cycle, significantly altering the economic landscape. “As a result, I’ve kind of revised my opinion,” he said.
“Given the circumstances, I think it is likely we do see much slower growth in 2024.”
Harvey also noted that the inverted yield curve acts as a self-fulfilling prophecy, signaling to companies and investors that a slowdown is imminent, which then affects spending and business behavior, ultimately leading to reduced activity.
He emphasized that the inversion itself is not the final indicator of a recession. Instead, it is when the curve de-inverts and long-term yields again exceed those of short-term bonds, that a downturn is confirmed.
Why It Matters: Harvey’s prediction aligns with other notable figures in the financial world who have also expressed concerns about a potential recession in 2024. Jeffrey Gundlach, CEO of DoubleLine Capital, warned of a 75% chance of a recession and advised against investing in the S&P 500.
Similarly, economist Peter Schiff forecasted a recession in 2024, attributing it to the Federal Reserve’s efforts to restore price stability potentially backfiring.
However, Rick Rieder, the Chief Investment Officer of global fixed income at BlackRock, dismissed recession fears and predicted a surge of up to 12% in stocks for 2024. He lauded the robust performance of Big Tech companies, pointing to their exceptional revenue growth and impressive cash generation.
Image Via Shutterstock