Financial markets flash warning signs of US recession

WASHINGTON (AP) – Financial markets are flashing a key warning sign of a recession, and the global economy is weakening as the US-China trade war intensifies.

All of which is heightening fear about the US economy and about whether the 10-year expansion, the longest on record, is nearing an end.

On Wednesday, a rare realignment in interest rates intensified those worries: The yield on the benchmark 10year US Treasury note briefly fell below the yield on the 2-year Treasury for the first time since 2007.

Normally, investors earn higher interest on longer-term bonds than on short-term ones. Put another way, the government will usually pay more to investors who are willing to lend their money for longer periods.

So when that equation reverses itself — when longerterm Treasurys pay less than shorter-term ones — economists call it an ”inverted yield curve .” An inverted curve suggests that bond investors expect growth to slow so much that the Federal Reserve will soon feel compelled to slash short-term rates to try to support the economy.

In short, it’s a sign of economic pessimism. Inverted curves are, in fact, remarkably reliable harbingers of recessions: They have occurred before each of the past five downturns.

The inversion sent stocks plunging Wednesday, with the Dow Jones tumbling 800 points, or three percet. Still, an inversion says little about timing of a forthcoming recession. On average, an inversion occurs roughly two years before a downturn.

So are we nearing a recession? Many economists worry that recession odds are rising. Julia Coronado, chief economist at MacroPolicy Perspectives, sees a 40 percent probability of a downturn within the next 12 months, up from 30 percet last month.

Those concerns stem in part from the US-China trade war, which appears to have discouraged many businesses from expanding and investing in new buildings and equipment. It is also harming Germany’s exportled economy, which shrank in the second quarter. A chaotic British exit from the European Union looms this fall. Japan and South Korea are also engaged in a trade fight.

And the Trump administration has essentially acknowledged that its planned 10 percet tariffs on $300 billion of mostly consumer goods from China would hurt US shoppers. That’s because many retailers would raise prices to account for the higher tariffs on Chinese imports they would have to pay.

On Tuesday, Trump said he would delay, from Sept. 1 to Dec. 15, the tax on more than half those imports to avoid raising prices for holiday shoppers.

Still, for now, most economic signs appear solid. Employers are adding jobs at a steady pace, the unemployment rate remains near a 50-year low and consumers are optimistic.

“I wouldn’t forecast a recession just on the yield curve,” said Eric Winograd, senior economist at AllianceBernstein. “I would want to see other signals that point to that, but we’re not seeing them right now.”

How severe might a recession be? If there is one anytime soon, it’s hard to tell how long or deep it will be. But many economists think it might be relatively mild. That’s because American households are in stronger financial shape than before the Great Recession. Mortgages and household debts, as a percentage of overall incomes, are lower. And ultra-low interest rates make it easier for consumers to stay current on their debts.

Since it’s hard to know when or if a recession will occur, most experts advise against drastic moves, such as rashly selling stock holdings or postponing major purchases that you can otherwise afford.

Generally, it makes sense to do what most personal finance experts typically recommend: Pay off credit card and other high-interest debt and make sure you have a cushion of savings.