When the yield curve inverts in the bond market, the yield on a longer term bond dips below that on a shorter term bond. Before every recession since 1969, the 10-year U.S. Treasury bond dipped below the 2-year, as it did earlier this month.
But an inversion doesn’t always mean a recession is coming, Eddie Ghabour, co-founder of Key Advisors Group, told Yahoo Finance’s YFi AM this week. In fact, he pointed to a potentially bigger “red flag” that could signal an impending recession.
“I would say it's a very small chance of a recession here in the U.S., simply because the consumer is so strong,” Ghabour said. “Frankly, that is what is holding our economy so strong right now. The next red flag I would see is if you start to see consumer confidence go down with the business spending going down, then I think you see a much bigger red flag in regards to a recession.”
Currently, he said, many Americans “feel comfortable and confident” that they can hold onto their jobs remaining at a near 50-year low at 3.7%.
“When you have that confidence as a consumer, you have more confidence to spend,” he continued. “And as we know, 70% of our GDP is based on consumer spending. So as long as the labor market stays tight and the wages stay where they are or even potentially go up, that's going to continue to hold our economy above the rest around the world.”
For now, Ghabour thinks that the idea of a recession is overblown and “scaring investors.”
He did acknowledge, though, that “there's certainly softening right now in the economy. There's a slowdown happening. And then if the tariffs come into effect like they're scheduled to in September and December, that will add some additional economic pressure. But again, you know, I wouldn't be surprised if maybe they punt and delay that as well too.”
Chelsea Lombardo is a production assistant for Yahoo Finance. You can find more of her work here.