Concerns regarding a possible recession in the United States economy are growing, as multiple signs of uncertainty continue to emerge. A recent analysis by The Kobeissi Letter, a capital market commentary platform, released on June 22, indicated that the likelihood of a recession within the next year remains substantial.
Utilizing the US Treasury yield curve, the Federal Reserve model currently estimates a 52% chance of an economic downturn in the next 12 months. Although this probability has decreased from its peak of 71% in May 2023, it still serves as a warning for the US economy.
Historically, whenever the model has shown a recession probability exceeding 30%, an economic downturn has followed within two years. This pattern has been consistent over the past four decades, highlighting the reliability of this indicator.
The yield curve, an important economic gauge, has been inverted for a record-breaking 700 days. An inverted yield curve, where short-term interest rates surpass long-term rates, usually precedes a recession. The prolonged inversion complicates the chances of a “soft landing,” where the economy slows down without entering a recession.
Given the historical data and current economic signals, the likelihood of avoiding a recession seems slim. If a recession does occur, it would challenge the predictive accuracy of the yield curve.
The Kobeissi Letter stated, “Over the last 40 years, each time the recession probability has exceeded 30%, the US economy has experienced a downturn within 2 years. Meanwhile, the yield curve has been inverted for over 700 days, the longest period in history. Achieving a soft landing may prove to be challenging.”
Various indicators pointing towards a recession have surfaced, including a concerning trend in the labor market where permanent job losses are rapidly increasing. Since 1995, significant spikes in permanent job losses have consistently preceded recessions.
