Inverted Yield Curve – Leading Indicator

Here is the fact – the US Yield Curve first inverted on March 27th, 2019. Historically the inverted yield curve leads to a recession, as the graph below shows. Thus, the US economy was headed towards a recession long before the Covid-19 pandemics started.

The Trigger: De-globalization

The escalating US-China trade was the obvious trigger for the recessionary expectations in early-to-mid 2019. However, more broadly the trend of de-globalization has been gradually unfolding since 2016 (Brexit, US elections). Obviously, reduced global trade, combined with reduced global capital and labor mobility is depressionary. Thus, many suggest that de-globalization is actually not feasible – it would destroy the global economy. The Phase 1 trade agreement and an apparent de-escalation in US-China trade war was a welcomed sign, even though it appeared to be just the pre-2020-election posturing.

The Effect of the Pandemics

Yes, the US entered a very deep recession in 2020 due to the forced economic shutdown to prevent the spread of the virus. However, the most severe impact of the Covid-19 pandemics will be reflected in the trend of accelerated de-globalization in the aftermath of the pandemics. In another words, a more severe recession is still forthcoming.