Market Watchers Say US Recession Is Coming

Market watchers have sent out a warning that the U.S. economy might be heading toward a recession.

According to Reuters, the rise of risk premiums on investment-grade corporate bonds over comparable Treasuries, which have been increasing since February, is one factor that has analysts worried.

“People are talking about the yield curve as a predictor of recessions. Credit spreads are the other element that’s a pretty big tell,” said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments in Minneapolis.

While the economy seems healthy, current global trade tensions are another concern for the future. Other possible warning signs: U.S. inflation remains low – taking away pricing power from businesses – benchmark interest rates are rising and the federal deficit is getting bigger due to a massive tax cut in revenues.

However, there is some good news: Although the yield curve has flattened, it has not inverted, which is seen as the most reliable indicator of a recession.

“We have had a weird recovery. If you have a weird recovery, you might have a weird recession,” said Jim Paulsen, chief investment strategist at the Leuthold Group in Minneapolis.

Some fund managers also believe that a strong U.S. economy, coupled with a cautious Federal Reserve, should keep a recession at bay – at least for another year.

“I think it’s premature that the credit market is sending any kind of cautionary signal,” said John Bellows, portfolio manager at Western Asset Management Company in Pasadena, California.

Bellows pointed out that the economy was growing at nearly a 4 percent pace in the second quarter, and can handle gradual rate increases from the Fed.

But there are signs that the U.S. central bank may raise overnight borrowing costs twice more this year – and analysts will be watching to see how the corporate bond market reacts.

“This is not the end-all of recession indicators. It’s just one,” said Leuthold’s Paulsen. “It does make me worry.”