In The Coming US Recession Charted (June 20, 2015) we argued that the US economy is heading toward recession, not escape velocity as the sell-side and Fed officials have been telling us. Today we will revisit the possibility of the US entering a recession in 2016 and by extension substantiate our argument for NIRP, and not lift-off, as the most likely next move by FOMC.
One of the most reliable predictors for the business cycle is the yield curve. Unfortunately, due to Federal Reserve manipulation, whereby the short end of the curve have been permanently pegged to zero, an inverted yield curve is more or less impossible. However, if we look at the relative change from trend we can construct an equally good predictor. The blue line in the chart below depicts difference in the 10/5 term spread vs. its underlying trend. Historically, a breach of 50 basis points have indicated an upcoming recession. While the current trend deviation is not giving a clear signal yet, it is close enough to suggest we are heading straight into another recession.
This post was published at David Stockmans Contra Corner on October 11, 2015.
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