Predicting a recession is difficult. As we’ve seen with the war in Ukraine and COVID-19, there are so many incalculable, unstable variables that can affect even the most respected economists’ forecasts. As Société Générale strategist Albert Edwards explained in a recent report: “History shows that in cases where the (limited) number of economists do predict a recession, the recession The sluggishness usually means they’ve given up waiting.” Click it when it arrives. “
However, despite the continued resilience of the U.S. economy, economists at Deutsche Bank are not abandoning their recession forecasts. Experts at the 153-year-old German institution, the first major investment bank to predict a U.S. recession in 2022, are sticking to their guns this year, warning of another unpleasant and inevitable “boom and bust” cycle. cycle”.
To support their predictions, a Deutsche Bank team led by Jim Reid, global head of economics and thematic research, earlier this month analyzed 34 U.S. recessions since 1854, looking for patterns in economic history. The research team highlighted four key macroeconomic triggers that have led to recessions in the past: rapidly rising short-term interest rates, soaring inflation, an inverted yield curve and oil price shocks.
For each trigger, Reed and his team calculated the historical “hit rate,” or the percentage of times those events occurred that resulted in a recession. They found that no single macroeconomic trigger accurately predicts a recession, but that all four of the triggers most commonly associated with recessions are currently occurring.
“It is impossible to accurately predict every recession using macro triggers,” Reid wrote in a follow-up discussion of the study on Thursday. “But it’s fair to say that the most important factors (triggers) of this cycle have been broken, and the U.S. tends to be more sensitive to these factors historically.”
Here are Deutsche Bank’s recession triggers and their “hit rate” when predicting recessions.
Interest rates are rising rapidly – 69%
First, rising interest rates tend to raise borrowing costs for businesses and consumers, which in turn puts pressure on economic growth, which often leads to a recession. Deutsche Bank research shows that since 1854, U.S. short-term interest rates have risen by 2.5 percentage points in 24 months, and recessions have occurred about 69% of the time within three years.
Over the past 18 months, the Federal Reserve has raised the federal funds rate by about 5.2 percentage points to curb inflation. Historically, this has not ended well for the economy, as Deutsche Bank shows in its research.
“The U.S. appears to be the most sensitive to interest rates,” Reed wrote Thursday of the data. “Historically, the U.S. has had more boom-and-bust economic cycles than other countries in the G7,” he added.
Inflation surges – 77%
Inflation surged to over 9% in June 2022, a 40-year high, but has since fallen back to a much more modest 3.7%. Historically, though, the U.S. economy has not responded well to spikes in inflation. Since 1854, a 3 percentage point rise in inflation over 24 months has caused a recession within three years 77% of the time.
The U.S. economy “appears to be most sensitive to spikes in inflation,” Reed explained, noting that France, the U.K. and Germany all have lower hit rates when high inflation triggers recessions.
Yield curve inverted – 74%
Typically, long-term bonds have higher yields than short-term bonds because investors take on greater risk when lending money over a longer period of time. But sometimes, this equation can get reversed for a variety of reasons. When this happens, yields on short-term bonds end up being higher than on long-term bonds, which is called an inversion of the yield curve.
U.S. Treasuries have been in an inversion since July 2022, which Deutsche Bank said has historically not boded well for the economy. “In terms of yield curve inversion, the U.S. again has the highest hit rate at 74.1%,” Reed explained. “If you look only at the period since the 1953 recession, this rises to 79.9%.”
Oil price shock – 45%
Since June, Brent crude oil prices have surged about 33% to more than $95 a barrel, leading many economists to worry that inflation may be more difficult to contain than the Federal Reserve thought.
However, Deutsche Bank actually found that oil price shocks are less likely to signal a recession than other macroeconomic triggers, at least in the United States. When oil prices surge 25% over a 12-month period, the U.S. has experienced a recession 45.9% of the time historically. Even if oil prices soared 50% in two years, the probability of a recession would be only 48.2%.
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