Economist Predicts Recession in 2024 Amid Concerning Financial Indicators
A prediction of an upcoming recession in 2024 by economist Cam Harvey has brought attention to concerning financial trends, including a persistent Treasury yield curve inversion.
Alex Carter
- 2024-01-07
- Updated 09:17 AM ET
(NewsNibs) - Duke University Professor and Research Director at Research Affiliates, Cam Harvey has indicated that a recession in 2024 is likely, based on historical economic indicators. Central to Harvey's assertion is the Treasury yield curve inversion – a phenomenon where short-term debt instruments yield more than long-term ones. An official inversion, recognized when 3-month Treasury bill yields surpass 10-year note yields for a continuous period of at least three months, has historically been a precursor to recessions. Indeed, the last eight recessions were all preceded by yield curve inversions, and the current inversion has already persisted for 12 months. Harvey, who initially doubted the current model's reliability, revised his opinion following the Federal Reserve's stringent rate policies. As the Fed keeps interest rates high, the likelihood of a downturn becomes more imminent.
Consumer Confidence and Economic Strain
The plausible recession is expected to dampen consumer spending, a pillar of the US economy that constitutes nearly two-thirds of the GDP. Household savings have dwindled to levels seen in 2019, which may result in more frugal consumer behavior. Furthermore, Harvey has observed an uptick in delinquencies on auto loans and credit card debt. Additionally, a decline in investment spending, which showed negative growth year-over-year in 2023, contributes to the growing recession concerns. Companies have been navigating the heightened risk environment by adopting cautious investment strategies and measured hiring practices to stave off potential mass layoffs.
Financial System Under Pressure
The financial sector is not immune to the stresses imposed by the inverted yield curve. Banks, in particular, are feeling the squeeze as they lose deposits to higher-yielding alternatives like money market funds. This transition is partly due to the material losses on securities that many banks are grappling with, reminiscent of issues that afflicted Silicon Valley Bank. Deposits and lending at banks have been affected, evidenced by 49.2% of senior loan officers reporting tighter lending standards for small businesses in the third quarter of 2023, although this figure dropped to 30.4% in the fourth quarter. Another stark indicator of economic distress is the high office vacancy rates in metropolitan areas such as San Francisco and Chicago, hinting at a downturn in commercial real estate that could further stress banking loans.
The International Aspect and Mitigation Efforts
Internationally, the Chinese economy's growth of 3% in 2022 – the lowest since 1976, barring the outlier year of 2020 – adds to global economic uncertainties. Meanwhile, Harvey highlights that Federal Reserve policies have the potential to mitigate the severity of the impending downturn. As businesses and financial institutions brace for a challenging economic climate, the actions of policymakers will be closely watched for their impact on both the domestic and global economies.
