No Recession? All Of A Sudden Yield Spreads Are Collapsing
No recession. That was the recent declaration from Treasury Secretary Janet Yellen, noting that consumer spending, industrial output, credit quality, and other indicators don’t suggest economic risk.
“You don’t see any of the signs. A recession is a broad-based contraction affecting many sectors of the economy. We just don’t have that. We’ve cut the deficit by a record one and a half trillion dollars this year. We’ve seen gas prices come down by about 50 cents in recent weeks, and there should be more in the pipeline. And hopefully, we will pass a bill that will lower prescription drug costs and maintain current levels of health care costs.”
Before we dig into recession risk, there are quite a few fallacies in Yellen’s statement. Industrial output is collapsing, as shown by our Economic Output Composite Index, which comprises more than 100 manufacturing and service-sector data points.
Furthermore, neither Treasury Secretary Janet Yellen nor the Administration had anything to do with reducing the deficit. Such was only a function of the expiration of the excess spending bills in 2020 and 2021. The deficit is just reverting to its long-term linear trend, as shown below. Given that trendline continues to decline, such suggests the current Administration is spending more than its predecessors.
Notably, that massive flood of deficit spending is what drove the massive surge in economic growth. The reduction of the deficit will contribute to the building of recessionary pressures.