Yield Curve and Politics 101

The yield curve (showing investment rates over time) is an indicator of an economy’s health. When the curve is sloping up, the economy is expanding and overall doing well. It is when the curve starts to level out that it becomes worrisome as this generally means that an economic slowdown – or recession – is on the rise. Looking at the curve’s latest data from the U.S Department of the Treasury, we are bound to see a slowdown very soon.

Slowdown or Recession?:

The United States does not define a recession as two consecutive quarters of shrinking output” however that is the rule of thumb at most economists go by. A recession is only declared after a recession-dating committee declares it. This can cause problems. The committee may declare a recession late, despite clear economic indicators that one was imminent (this is infact what happened in 2008). This issue then can transfer over to politics and who is to blame for the recession. It is not uncommon for the president presiding the recession to be blamed for its cause – even though decline in an economy is natural due to the business cycle – and with an election coming up in the next year, this may become a larger political issue.

Rober Gordon, a “Northwestern University economist who has been on the recession-dating committee since 1978” says “it really is highly unlikely” that the committee will declare a recession before the 2020 election. This could have an effect over the next several presidential elections and Trump has already started to mention the potential downfall of the economy if Democrats take office, showing just how powerful of a political tool a recession truly is and why we need to start paying attention to the yield curve now.

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