FAYETTEVILLE, Ark. (KNWA) — (8/19/19) Slow growth in the U.S. economy has investors worried about the markets. Interest rates on bonds aren’t high enough for investor confidence, and a mechanism that predicts recessions is causing alarm.
Tumbling bond yields struck the market this week. Investors are leery of a scenario called an “inverted yield curve”, which occurs when interest rates on short-term bonds are higher than ones paid by long-term bonds. Since 1955, these have accurately predicted an oncoming recession, and the situation popped up this week.
Mervin Jebaraj is the University of Arkansas’ Center of Business and Economic Research Director, and he said the inverted yield curve might’ve been caused by other factors. He said Arkansans should have a plan in place in case the markets have a downturn.
“I think consumers should, as much as possible, be prepared for when there is a downturn, and there’s a lot of sound financial advice out there about how much you should have in savings,” Jebaraj said. “Ideally, [have] anywhere from three to six months of your income in a savings pool so that if you lose your job from a mild recession, you still have enough savings to fall back on.”
By definition, a recession is a period of temporary economic decline. It is generally identified by a fall in gross domestic product (GDP) in two successive quarters. Typically, recessions result in increased unemployment and a drop in consumer spending.
Jebaraj said the ongoing trade war looms large in worries about a recession.
“There are fears that there is a global economic slowdown and that there is a recession coming, and a lot of that has to do with the trade wars and how that’s affected the global economy and our economy, as well,” Jebaraj said. “That could the reason we’re seeing a yield curve inversion, and in that case, a recession very well could be coming on.”
Jebaraj said people could be buying 10-year treasuries simply because other long-term bonds from other countries have negative yields. The U.S. treasury is offering a little more than a 2% return on 10-year bonds, and while that’s not high, it’s better than other countries’ returns over a 10-year time period.
“If there is a large demand for 10-year treasuries, then that pushes the yields down, too,” Jebaraj said.
The simple lack of expected growth could also play a role in the yield curve inversion, Jebaraj said.
“Just about every projection over the U.S. economy over the next 10 years indicates that we’ll grow on a yearly average by 2% or less, which is not very much growth at all,” Jebaraj said. “Inflation expectations over that 10-year time period are anchored under 2%. We haven’t gotten to a consistent 2% inflation since 2012 or 2013.”
Investment has been slow despite the large corporate tax cut in late 2017, Jebaraj said, and consumers can only prepare themselves should a recession occur.