The stock market fell more than eight hundred points Wednesday, the largest one-day drop of the year. It rebounded somewhat yesterday to finish up nearly one hundred points, but concerns about the global economy persist.
The decline Wednesday was precipitated by a “yield curve inversion” that made headlines when it occurred for the first time since 2007. What is this? Why does it matter?
Is a recession coming?
The Washington Post explains that an “inverted yield curve” occurs “when the interest rates on short-term bonds are higher than the interest rates paid by long-term bonds.” In other words, “people are so worried about the near-term future that they are piling into safer long-term investments.”
According to the Post, “the yield curve has inverted before every US recession since 1955, suggesting to some investors that an economic downturn is coming.” The Federal Reserve Bank of San Francisco has also stated that the yield curve “has a strikingly accurate record for forecasting recessions.”
However, there are also strong reasons to believe the economy will not go into a recession. The labor market is strong—the economy added 164,000 jobs in July as employers say this is a “golden age” to get a job or to ask for better pay and benefits.
One expert stated as recently as July 26, “I don’t see any warning signs right now. It’s hard to be against the economy when the consumer is in such good shape.” Another expert added, “I wouldn’t forecast a recession just on the yield curve. I would want to see other signals that point to that, but we’re not seeing them right now.”
We may just be experiencing the challenges typical of the stock market in August. Many economists think a recession, if and when it comes, might be relatively mild since American households are in stronger financial shape than before the Great Recession. And the Washington Post notes that yield curves have…
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