The US just got a big recession warning on Wednesday, with yields on longer-term federal debt dropping below yields on shorter-term debt.
That could cause panic for anyone who remembers the last time that happened: right before the Great Recession that began in 2007.
The following years saw massive amounts of economic chaos around the world. Throughout the fall of 2008, Wall Street shook as century-old investment banks were toppled amid a collapse of the overheated US housing market. Hundreds of thousands of jobs were lost every month, and the unemployment rate hit a high of 10% in October 2009. A decade later, the effects of the worst recession in generations is still being felt, with the labor market only recently coming close to a full recovery.
While a financial crisis and recession as severe as the last one remain unlikely, markets are now warning that economic turbulence could lie ahead.
The spread between 2-year and 10-year Treasury yields fell below zero for the first time since 2007. Normally, interest rates on short-term debt are lower than rates for longer-term debt, as the latter ties up capital for longer and is generally considered more risky and thus demanding of a higher return.
A reversal of that pattern is generally viewed by investors and economists as a bad sign for the economy going forward. Indeed, the yield curve inverted before each of the last seven US recessions.
To put the prospect of a recession in the US in perspective, we took a look at the history of recessions across the world. For our purposes, we used the technical definition of a recession as being two or more consecutive quarters of negative real GDP growth.
It's worth noting that the National Bureau of Economic Research, which establishes the official dates of recessions in the United States, takes a more holistic approach. According to the NBER website, they define a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
The chart below shows the history of technical recessions for each country tracked in the OECD's database of quarterly real GDP growth rates going back to 1960.
The impact of the Great Recession is clear, with most of the countries in the OECD database suffering from prolonged periods of economic contraction in those years. Argentina, which is facing economic headwinds after a surprise primary election result led to a 48% stock market crash on Monday, has been in a technical recession for about 23% of all quarters since the OECD's data for that country began in 1993.
On the flipside, as noted in a similar chart from HSBC in 2017, Australia has avoided a technical recession for nearly three decades.
Here's the chart illustrating technical recessions going back to 1960:
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