Monday, November 13, 2023

When it comes to the U.S. economy, it’s like we see one thing and hear another. For example, despite all sorts of concerning red flags, major institutions like Bank of America and the Federal Reserve are erasing recession from their forecasts, basically saying we’re not going to have one.

But one bank is sticking firm on recession – Deutsche Bank. The German institution was the first to call for a major recession in the U.S. in 2022. It’s standing firm with a recent study.

Deutsche Bank analyzed 34 American recessions since 1854. It found four major triggers of a recession as well as the percentage of times a recession followed each trigger. All four are flashing currently.

The first trigger is an inflation spike. When inflation increases 3% or more from two years prior, a recession happens within the next three years 77% of the time.

We’re in this danger zone right now. In May 2020, inflation was growing at a two-year rate of 2%. One year later, the two-year change in inflation was 5.15%, or 3.15% net growth.

The second trigger is an inverted yield curve, which precedes recession 74% of the time. This is when short-term yields (e.g., two-year Treasury) are greater than long-term yields (e.g., 10-year Treasury). This happened in each of the last eight recessions by anywhere from six to 24 months.

Third is a rapid rise in interest rates. In the past 170 years, when rates rose by either 1.5% for 12 months rolling or 2.5% points for 24 months rolling, 69% of the time a recession followed within 36 months.

Lastly, an oil price shock triggers recessions 46% of the time. The cost of Brent crude oil has surged as much as 34% since June. Thankfully, this trigger isn’t as reliable when it comes to predicting recessions.

Still, these four triggers are aligned, and Deutsche Bank says there’s a 76% possibility of a recession. We’re not out of the woods yet.

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