[The Economist Perspective with
Blu Putnam] – Blu Putnam: How to spot a
recession? Most economists only
see a recession in the rear view mirror
after it has already started. Although some economists
watch the equity markets, in every swoon in the equity
market they are worried about recession and then it
rarely happens. And then of course
there is the inverted yield curve, it is a superb measure
of future recessions, but it has a real big problem. Timing. When the yield curve inverts,
short term rates higher than long term bond yields
it can mean a recession is coming in 6 months, 12
months, may be two years and if break policy
is changing that time recession may not occur
at all, that is what is happening in the US by the way
the Fed has changed direction so the yield curve may not
be even signaling a recession is coming. So, what do we look at for
shorter term indicators? One of the best ones is to look
at high yield debt. Now, if you think about how
high yield debt, it is often viewed as an option,
so if you own a stock it is like owning a call option
on the assets of the company the stock goes up, the call
option goes up. If you own debt, it is like
owning a put option on the assets of a company, so
if the company goes South and is not making money anymore
the high yield debt interest rate is going to go up, so when
high yield debt interest rates go up, your put option is
losing money, the debt is not doing well and it is a
signal a recession could be coming, so we watch high yield
debt spreads against government bond spreads, but
they have to rise significantly a small rise in high yield debt
interest rates is no big deal but a big rise, watch out. Now, people also look at the
jobs market, all recessions have a lot of jobs
losses, the thing about it is the companies get in
trouble, they are not making money and then they
cut jobs. So, jobs are a lagging
indicator, but if you are looking at jobs and you are
thinking about a US recession you can watch the weekly new
unemployment claims, that is the most recent data and
by the way if a recession happens, that data turns
South really fast, you will know it in just three or four
five weeks because it just gets worse and worse and
worse. So, that is what we watch
first high yield bonds, then we watch the jobs and hopefully w
we can see this before it’s coming. I am Blu Putnam,
Chief Economist, CME Group. [Line Break]

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One thought on “Economist Perspective: How to Spot a Recession”

  1. I love how chairman powell earlier this year said they dont beleive the inversion of the yield curve predicts recessions. Now they suddenly start cutting rates… hilarious.

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