A few weeks ago, we had a one-day precipitous drop in the stock market which was blamed on the appearance of an inverted yield curve, which for some analysts signals that a recession can be on the horizon. This begs two questions. First, what is an inverted yield curve? Simply, an inversion occurs when long-term rates become lower than short-term rates. Typically, long-term interest rates are higher than short-term rates. When you go to the bank and you tie up your money in a CD for a longer period of time, you expect the bank to pay you a higher rate for the longer term.
Second, why is an inversion seen as a harbinger of bad times? Inverted yield curves typically occur some time before recessions because the markets see slower growth ahead, which causes long-term rates to fall. Short-term rates will fall only when the Federal Reserve Board trims their benchmark rates. Thus, today the markets are predicting a slowdown in growth, but the Fed has not lowered short-term rates as they have only just declared that they are just about done raising short-term rates. We have actually seen a flat yield curve for the past several months, and the Feds more recent statements about ending their increases has helped bring long-term rates down even further.
Here is the point. While an inverted yield curve can be a predictor of recessions and slower growth, predictions are never guaranteed. To see real evidence, we should look at the economic indicators. A very important indicator was released Friday. The jobs report showed 196,000 jobs added in March. Following a weak February report, this has relieved many analysts who thought February was a harbinger that the slowdown was already here. For the first quarter we added an average of 180,000 jobs per month, subject to two future revisions. Again, no guarantee that even a mild recession is on the horizon, but an indication that employment growth has slowed from the brisk pace of last year.
Dave Hershman is the top author in the mortgage industry. Dave has published seven books, as well as hundreds of articles and is the founder of the OriginationPro Marketing System and Mortgage School. Want to send this commentary and other news in a personalized format to your sphere database or on social media? Sign up for a free trial at www.OriginationPro.com.