The creator of the market's most renowned recession predictor thinks 3 variables will make a slump bearable.

The indicator's creator said this week that the inverted yield curve suggests a recession. However, high labor demand and a stronger housing market will mitigate the effect. The analyst argued the Fed misreads inflation and should drop rates now. Campbell Harvey stated in a Research Affiliates note that the inverted yield curve has remained red for 15 months, but economic strength doesn't invalidate it.

Harvey discovered the most prominent recession signal, which predicts a slump when short-term Treasury bill yields exceed longer-term bond yields. As with every recession since the 1960s, the present inversion suggests a dip this year, but a few variables will restrict the slowdown, letting the US land softly.

Given the yield indicator's track record, ignoring it is risky," said the Duke economist. "The yield curve predicts weak growth in 2024. A recession may or may not cause this sluggish growth. A modest recession is possible even with a smooth landing

First, high labor demand precludes a serious recession. When the economy cools, unemployment won't rise since there are 2.5 million job opportunities and job searchers. With more persons employed, consumer spending will remain high.

Today's housing market will prevent a foreclosure catastrophe like the 2008 recession, when many homeowners owed more than their homes were worth due to high debt.

Due to pandemic-induced price rise, home market equity exceeds mortgage debt this time. In 2023, Americans had $30 trillion in home equity and $17 trillion in mortgage debt.

Businesses take precautionary action when Treasury rates flip due to prior experience with the inverted yield curve. Business investment fell through 2023, and some cut staff. "Leaner companies are more likely to survive a recession. This risk management reduces business cycle volatility, which is desirable "Harvey wrote.

The US economy's future is unknown. Harvey believed the Federal Reserve overshot interest rates, increasing recession chances. He claimed the central bank is misunderstanding inflation figures since shelter inflation is lower than indicated.

Recalculating the year-to-year CPI, it falls below the Fed's 2% objective. My best recession mitigation strategy is for the Fed to immediately change direction. Cuts should begin promptly to lower the Fed Funds rate to 3.5% by year's end from 5.25% presently."