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4 Reasons Recession Is Likely in 2024: Inverted Yield Curve Godfather

Cam Harvey, the economist who discovered the Treasury yield curve’s ability to forecast recessions, is reiterating his call that a downturn is likely ahead in 2024.

Harvey’s model says that when yields on 3-month Treasury bills stay higher than those on 10-year notes for at least three months — triggering an official inversion — a recession will follow. The indicator has preceded each of the last eight recessions and has not produced any false positives.

Yields on the two government bond durations have been officially inverted for 12 months now.

Harvey, a professor at Duke University and the director of research at Research Affiliates, said in a video presentation last month that the average lead time of inversions for the last four recessions has been 13 months, meaning a recession could be looming.

In December 2022, Harvey told Business Insider that he believed the model would produce its first false signal this time around. But as the Federal Reserve held rates higher, he then said in April 2023 that he was reversing his call, and believed a recession would come.

Last month, he said again that a recession is probable this year.

“Given the Fed’s actions of keeping rates too high for too long, I think the probability of a recession has greatly increased,” Harvey said. “So no longer would I say that we can avoid completely a slowdown.”

4 reasons a recession is likely

In the video, Harvey shared several reasons he believes a recession is likely. One is that consumer spending will be weaker this year as savings have dwindled. Data from market research firm Bespoke Investment Group shows household savings are back to 2019 levels. Consumer spending makes up nearly two-thirds of US GDP, making it a crucial variable for economic growth.

There are signs that consumers are already weakening, he said, like the fact that delinquencies are already rising on things like auto loans and credit card debt.

delinquency rates credit card debt

Federal Reserve Bank of St. Louis



Another part of the GDP equation is investment spending, which went negative year-over-year in 2023. Harvey said this would contribute to weaker growth ahead.

Third, Harvey believes there’s an increased risk of a credit squeeze, or a drop in lending, as the inverted yield curve hurts banks’ business models and balance sheets. For example, banks are losing deposits to money market funds, hurting their liquidity levels. And like Silicon Valley Bank, many banks have taken material losses on held-to-maturity securities.

“There’s many banks that look similar to SVB, and this is worrisome because when SVB went down, long rates were 3.5% and we’re roughly 100 basis points higher today,” Harvey said.

Banks may also have to face a potential reckoning in commercial real estate this year, he said.

“With an office vacancy rate of 35% in San Francisco, near 25% in Chicago, this market’s cratering,” he said. “Many of the real estate have loans with banks, and banks will have to deal with that in 2024. So it’s not a great situation.”

Banks have become increasingly cautious over the last couple of years about who they are lending money to, with 49.2% of senior loan officers in Q3 2023 saying they were tightening lending standards for small businesses. That number dropped, however, to 30.4% in Q4 2023.

lending standards

Federal Reserve Bank of St. Louis



Finally, Harvey said that a weak Chinese economy would do no favors for the US growth outlook. China’s economy grew by 3% in 2022; not counting 2020, it was the worst growth rate since 1976, according to World Bank data.

While he said a recession is likely, Harvey expressed hope that his indicator would be wrong, and said that companies taking a cautious approach to investment and hiring could help to mute the effects of a downturn. He also said action from the Federal Reserve could help mitigate risks.

“Many companies have taken actions that are in the motive of risk management. They realize that there’s a high probability of some sort of recession in 2024, and they’ve taken actions so that they don’t need to do mass layoffs,” he said. “I’m hopeful that we will not see any more increases in rates, and ideally we start to decrease the short-term interest rate. When you put that together, then we can lessen the blow.”


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