The Atlanta Federal Reserve on March 3 again issued its GDP Now projection, finding the U.S. economy could contract at an inflation-adjusted, annualized 2.8 percent rate for the first quarter of 2025. That is down further from its February 28 projection of negative 1.5 percent.
But this was a long time coming, with red lights flashing since 2022 as inflation overheated the U.S. economy amid a slowdown of global production following Covid and trillions of dollars of monetary and fiscal stimulus.
One reliable recession measure, the spread between 10-year treasuries and 2-year treasuries, has shown inversions—the 10-year interest rate goes lower than the 2-year rate and then stays there for a period of time as investors begin hedging against risk by locking higher long-term rates—in each of the last six recessions.
In 1978, the 10-year, 2-year spread inverted, foretelling the 1980 recession. In 1980, it predicted the 1981-1982 recession. In 1989, it predicted the 1990-1991 recession. In 2000, it predicted the 2001 recession. In 2006, it predicted the 2008-2009 recession. And in 2019, it predicted the 2020 COVID-19 recession. It’s like clockwork.
Sometimes, there’s a head-fake. For example, a brief inversion in 1998 did not result in a recession before another deeper inversion began in 2000, prior to the 2001 recession. But more or less, when recessions do occur, they are always preceded by such an inversion. Every single time.
It works with the 10-year, 1-year spread between treasuries, a longer more extended predicting all of the above recessions plus the 1969-1970 recession and the 1973-1975 recession.
In every recession, inflation always rose in tandem with the inversions. It reached its peak as the economy overheated and then began dipping as unemployment rose.
Similarly, as the spread between the 10-year and either the 2-year or 1-year treasuries uninverted, unemployment rose, too. Every single time.
So, where are we in the process? Well, the 10-year, 2-year, and the 10-year, 1-year both inverted in July 2022. When the 10-year and 2-year spread inverts, a recession tends to result, on average, 14 months afterward, sometimes sooner or later. The inversion is the prediction, and the narrowing and inevitable uninversion are when the pain is felt.
The 10-year and 2-year inversion peaked at -1.07 percent in March 2023 and -1.08 percent in July 2023. Since Dec. 2022, overall unemployment increased 1.1 million to 6.8 million by Jan. 2025 as President Donald Trump was being sworn into office. Similarly, the unemployment rate rose from a low of 3.4 percent in April 2023 to 4.0 percent now.
By the way, this is what the American people were saying in poll after poll the entire time former President Joe Biden was in office: The economy stinks. This prediction predicted the outcome of the 2024 election, with President Donald Trump winning over Vice President Kamala Harris and Biden being a one-term president.
The good news is that in each of the recessions on record, inflation went down significantly as demand slowed down either leading up to, during, or after the recession. Every single time.
Politically, voters tend to blame the prior administration’s party when a recession occurs or is already occurring at the beginning of a new administration. For example, Franklin Roosevelt, although the Great Depression continued during his tenure of office, was easily reelected in 1936. The same happened with Richard Nixon, who had a recession as he came into office but was easily reelected in 1972. Ronald Reagan also had a recession the first year, and was easily reelected in 1984. Barack Obama had an ongoing recession when he came into office and was easily reelected in 2012.
Of course, the history lesson will not prevent any contemporaneous partisan hand-wringing and finger-pointing, but it might just provide much-needed context. Recessions are highly cyclical, not born overnight, and often have many fathers. In this case, it appears President Trump inherited former President Biden’s recession, which was going to happen anyway.
Cross-posted with The Daily TorchVIA Conservative Firing Line
