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Summer comes before fall, so could Larry Summers accurately predict a recession?

The former US Treasury Secretary, speaking Friday on Bloomberg Television, became one of the most prominent economists to suggest the US is on track for a 2023 recession. The numbers that emerged last week seem to back him up.

Future Shock?

Summers, and others forecasting a coming recession, have a pretty powerful rhetorical haymaker to throw into the raging debate about the global economy. In the US, never has inflation topped 4% and unemployment dipped below 4% without sparking a recession in the following 24 months. In February, consumer prices rose an unthinkable 7.9%, and the unemployment rate was just 3.6%. If, as Shakespeare wrote, what's past is prologue, then history is on their side.

In Bloomberg's latest monthly survey of economists, 27.5% said there was a chance of a recession in the next year, up from 20% in March. "'Inflation shock' worsening, 'rates shock' just beginning, 'recession shock' coming," BofA chief investment strategist Michael Hartnett warned clients in a terribly unsubtle note last week. Adding fuel to the pessimistic fire, last week US bonds flashed an "inverted yield curve," which is when the return on two-year government bonds is higher than on 10-year government debt. The inversion is considered a warning sign of impending recession, forecasting five of the past six. That's a lot of evidence for those warning of a downturn. The question is: What's the rebuttal?

  • The inversion might not be so bad for markets: After previous yield curve inversions, the S&P 500 has returned a median 9% one year later and 16% two years later, according to Goldman Sachs.
  • People might be looking at the wrong yield curve: The gap between three-year bond yields and 10-year yields, which many experts consider a more reliable recession barometer, is wider than it was in January.

Room to Run: "Much of the academic work suggests that the [3/10 spread] is a better indicator of recession and that one looks more like the economy is red hot," Jonathan Golub, chief US equity strategist at Credit Suisse, told the Financial Times. "You've still got a lot of runway from an equity investing point of view."