Despite all the upbeat economic news being produced out of Washington, D.C., economic analysts and pundits are growing increasingly concerned about an economic indicator that historically has been extremely accurate in predicting that a recession is incoming for the U.S. economy.
It is called the yield curve.
Now odds are good that unless you majored in economics or just like reading economic analyses in your spare time, the yield curve is likely not on your radar screen.
Maybe it should be…
What exactly is the yield curve and why should you be interested in it? According to The New York Times:
The yield curve is basically the difference between interest rates on short-term United States government bonds, say, two-year Treasury notes, and long-term government bonds, like 10-year Treasury notes.
Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation. Lately, though, long-term bond yields have been stubbornly slow to rise — which suggests traders are concerned about long-term growth — even as the economy shows plenty of vitality.
At the same time, the Federal Reserve has been raising short-term rates, so the yield curve has been “flattening.” In other words, the gap between short-term interest rates and long-term rates is shrinking.
Back in 2010, when the U.S. economy first started to recover from the Great Recession, the gap between interest rates on 2-year and 10-year U.S. government bonds was slightly over 3%.
Now, halfway through 2018, according to The Times:
The gap between two-year and 10-year United States Treasury notes is roughly 0.34 percentage points. It was last at these levels in 2007 when the United States economy was heading into what was arguably the worst recession in almost 80 years.
This does not mean we are destined to enter another recession soon. However, if this trend continues, eventually the yield curve could “invert,” where long-term interest rates fall below short-term interest rates.
When this happens, it usually precedes a recession. An inversion is seen as “a powerful signal of recessions,” as the president of the New York Fed, John Williams, said this year, and that’s what everyone is watching for.
We don’t mean to rain on anyone’s economic parade and we try to avoid doom-and-gloom, “the world is ending soon” economic stories.
However, if you consider that we are in at least the eighth year of economic growth (depending on when you count the starting point) and every boom cycle we have seen is eventually followed by a downturn, even with the current positives in the U.S. economy, there is concern about whether the yield curve may be leading to a recession.
Obviously, the optimal time to exit your business is when we are enjoying a seller’s market. Fortunately, we are in the midst of the strongest seller’s market in ages. The question on everyone’s mind is when will it end?
Unfortunately, you never know that a seller’s market has ended until you are about 6 months into a buyer’s cycle, so waiting now is not wise. Particularly if the yield curve predictions that a recession could be looming for the U.S. prove to be accurate.
If you are considering exiting your business in the next year or so, then beginning the process now is key. To learn more about the exit planning services that Generational Equity provides, please use the following links or call us at 972-232-1121:
Remember – while the U.S. economy is encouraging right now, there are indicators that a recession may be looming. If you’re contemplating exiting your business, we recommend you don’t wait until these predictions come true to start your planning.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2018 Generational Equity, LLC. All Rights Reserved.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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