This article originally appeared on the Wall Street Journal on August 20, 2019.
The yield curve is upside down, leading to worry about recession. Stocks declined last week after the 10-year Treasury yield fell below the two-year Treasury yield. Yet while an inversion of the yield curve has preceded all postwar recessions, not all inversions signal imminent recession. The curve was flat for most of the 1990s, and even inverted briefly in 1998, without a recession. Today, given the economy’s underlying strength, fears of immediate recession are overblown.
U.S. gross domestic product grew 2.1% in the second quarter, and the Atlanta Federal Reserve forecasts 2.2% annualized third-quarter growth. The generally accepted definition of a recession is two consecutive quarters of negative GDP growth. GDP consists of four components: consumption, government spending, net exports and business investment.
Consumption looks strong. Through July, retail sales have increased this year, consumer confidence has rebounded, and productivity—output per hour worked—has experienced some of the largest increases in decades. When a recession occurs, weekly unemployment claims are first to tick up. They aren’t rising, and there are more openings than unemployed people. Given this labor-market strength, an increase in consumer spending—which accounted for 68% of GDP in 2018—is far likelier than a decrease.
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