We have been on the receiving end of endless analysis suggesting double-dip recession risks in the U.S. are either zero or completely trivial. The primary reasons given for this view are: the positively sloped yield curve, negative real short-term rates, no sign of inventory excess and no sign of a flattening in the trend in the leading indicators (aside from the Economic Cycle Research Institute’s weekly leading index).
We were sent one particular Street report recently that began with a comment on how the analysis incorporated data from the last eight recessions in the United States. But why are these eight recessions in the post-Second World War era relevant? This past recession was not just a blip or correction in GDP due to a manufacturing inventory-led recession; it was a traumatic asset price deflation and credit contraction of historic proportions.
Take us at our word, if Ben Bernanke is worried, it is not about what drives a post-Second World War cycle. He has the 1937-38 brutal downturn in mind and this is actually a much more appropriate template, notwithstanding the changed structure of the economy.
Heading into both the 1937-38 recession there was no sign of inventory excess (prior to the 1937-38 recession, inventories contributed 20 per cent to the economic expansion; in 2009, it was more than 60 per cent). And, going into the 1937-38 meltdown in the economy and the stock market, the U.S. yield curve was positively sloped to the tune of 240 basis points. But why do so many cling to the “yield curve” in a credit cycle in any event?
Just as the flattening yield curve and tightening Fed (the funds rate did rise 450 basis points) were no match for the parabolic credit expansion from 2003 to 2007, it would seem foolhardy to revert to the yield curve’s steepness today as some bellwether leading indicator when we are on the other (darker) side of the credit cycle. At best, it gives the banks another way to generate low-multiple trading profits, and that’s about it.
Moreover, where were “real” short-term interest rates heading into the unexpected 1937-38 collapse? How about minus 200 basis points. What was at play in that recession were not inventories, the curve or real rates – it was the sudden withdrawal of fiscal support after years of massive New Deal stimulus.
