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- The man behind Wall Street's favorite recession indicator expects the US economy to slow this year.
- Consumers are almost out of savings, and the Fed needs to cut rates to limit the fallout, he says.
- Duke professor Campbell Harvey discovered an inverted yield curve accurately predicts recessions.
The man behind the market's most reliable recession indicator says the US could suffer a mild downturn this year, and the Federal Reserve should slash interest rates to lessen the pain ahead.
Campbell Harvey, a finance professor at Duke University, was interning at a copper miner in the 1980s when he discovered that an inverted yield curve accurately predicts recessions, he recently told The Julia Roche Show. The 10-year and three-month Treasury yields inverted before eight of the last eight recessions with no false positives, and have been inverted for over a year now.
"The model is forecasting lower economic growth in 2024 and I believe that will be realized," Harvey said, predicting a slowdown this quarter that will continue into the summer. He suggested there wasn't a recession last year because demand was buoyed by gobs of government stimulus, as well as households tapping their pandemic savings and releasing their pent-up demand for things like shopping and traveling.
"The consumer really bailed out the economy in 2023," Harvey said, but "savings have been drawn down very substantially" based on rising loan delinquencies in recent months. "This suggests to me that the consumer has run out of steam."
Harvey also called on the Fed to end its inflation fight, arguing price growth has already normalized based on real-time housing data. The US central bank hiked interest rates from nearly zero to north of 5% between early 2022 and summer last year, and hasn't lowered them since.
"This stuff that I'm talking to you about, this is not rocket science, this is really simple stuff," he said. "What the Fed has done in this cycle has made things worse, so we will be very fortunate to get out of this with slow growth."
"If the Fed gets its act together and starts to do some remedial work to try to undo some of the damage, then I do believe that we have a good shot at having this soft landing," he continued. "It might a shallow recession, which would be great."
Harvey said it's too soon to say whether the current inversion of the yield curve is a false alarm, as there's an average delay of 13 months between inversion and recession. But he did warn the indicator's predictive power might be at risk, as it's so prominent now that company bosses might react to it by conducting early layoffs and taking other precautions. That could slow economic growth in the short term but prevent a full-blown recession later, he said.
The veteran academic also cautioned the US economy faces a raft of headwinds, ranging from the resumption of student-loan repayments last fall, to banking and geopolitical risks, China's slowdown hitting US exports, and ballooning interest payments on the national debt.
On the other hand, he argued the US should aim to accelerate economic growth to 5% by capitalizing on innovations like artificial intelligence and decentralized finance.