Canadian economist Campbell Harvey’s economic model, which has successfully predicted every major financial downturn since the 1980s, has warned that another recession is coming.
Harvey developed the U.S. Treasury yield curve model for his 1986 Ph.D., and so far, it has inverted thrice: in 1989, in 2000, and in 2006. All of these immediately preceded the three major recessions of 1990-1991, 2001, and 2008.
An inverted reading essentially means is that short-term bonds are paying higher rates than long-term bonds. As of July 2019, the model has shown an inverted state for an entire fiscal quarter.
“The idea of the yield curve is that when you lock up your money for different periods of time, you expect a different [interest] rate. The rate is almost always cheaper than if you commit for longer periods of time,” Harvey said in an interview with Global News.
“It’s almost always the case that the longer-term rates are higher than the shorter-term rates, but on certain rare occasions, it goes the other way. And that’s what we have today.”
Harvey added that while unemployment is at a record low and the stock market is at a historic high, these conditions are essentially what the economy demonstrated approximately a year before the three prior recessions.
“The key thing is, that’s exactly what it looks like before all recessions a year or a year and a half in advance so this is not surprising at all. This signal delivers a nine- to 18-month advance warning, historically.”