Talks of an impending recession in the US have long hogged the headlines, and everybody was calling for a recession in the second half of the year. Thus far we have seen little evidence of the US heading to a recession, a slowdown maybe, but not the recession we were expecting. One only needs to look at the rest of the world to see that some countries are already in a recession, but what makes the US case so much different.

One of the best metrics for a recession has been the yield curve inversion, which celebrated its one-year anniversary of being inverted. Yield curve inversions signal that borrowing conditions are very tight in the short end of the curve which has an impact on the longer end of the curve and thus an inversion is born.

Job losses lags yield curve inversion:

Normally, a recession follows a curve inversion and recessions are associated with job losses. The US job market has been resilient to say the least but one discount the time lag that an inverted yield curve has before the job losses start. In the past 3 recessions we had anything from 12 to 21 months before jobless claims breached 400k, which is considered the recession level by economists.

However, given the Fed’s aggressive hiking cycle this time around, the common thinking was that job losses will be a lot swifter, but employers have found unique ways of keeping staff, such as reducing work hours, for example.

Bond duration has sky rocketed:

Another reason why the US is not running into a credit crunch, which also happens in a recession, is the 0% interest rate bonanza that companies and private sector enjoyed during COVID. Average tenor of corporate bonds shot up, which means that cheap borrowing rates were locked in for longer and the need for refinancing is low, as the maturities of these bonds are longer dated. Companies can kick this can down the road for some time still.

While the economy is weak in the US, the time lag this time around a recession could be longer this time around due to the factors mentioned above, but given that the after effects of all the rate hiking has not washed through the market yet, we could see some swift changes.