Has The Inverted Yield Curve Lost Its Touch?
Heading into the second half of 2024, it appears the markets are no longer focusing on the odds for a recession. Given the prior track record of an inverted Treasury (UST) yield curve and the fact the UST 2-Year/10-Year differential has been in negative territory since mid-2022, it was not unreasonable to anticipate that a negative quarter or two of real gross domestic product (GDP) could be in the offing.
Nevertheless, the economy has proven to be far more resilient than anyone had expected, with an integral factor being the relatively solid labor market setting. The June jobs report did produce some mixed results, perhaps indicating some slowing in activity is now occurring. However, the underlying tenor of the data did not point towards any signs of apparent weakness.
Looking ahead, perhaps the best way to diagnose the economy’s prospects is to break real GDP into five cylinders of an engine. As long as the labor market doesn’t fall off a cliff, consumer spending is expected to remain a positive contributor. Gross private domestic investment could also be on the plus side but could be held back by residential outlays. Trade and inventories are typically wild cards in quarterly GDP calculations and we don’t see that changing anytime soon. Finally, baseline government outlays will more than likely be neutral at worse, with continued infrastructure spending possibly providing support.
Against this backdrop, we continue to expect the U.S. economy to produce modest growth and avoid an outright recession during the second half of this year...
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This article originally appeared on WisdomTree's website and is reprinted on VettaFi | Advisor Perspectives with permission from the author. For more information, please visit WisdomTree.com
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