This Indicator Says There’s Zero Chance of a Double-Dip

To quote Yogi Berra, “It’s like déjà vu all over again!”

On Tuesday, Federal Reserve Chairman Ben Bernanke addressed the International Monetary Conference and boldly declared that the U.S. economy is not headed for a double-dip recession.

The comment has stirred up all kinds of opposing sentiments – which is precisely what happened this time last year when everyone was convinced that the economy was doomed to “double-dip,” too.

In fact, the fears hit such fever-pitch levels that Google searches for “double-dip recession” increased five-fold over a three-month period last summer.

[ad#Google Adsense 336×280-IA]Back then, I ignored all the chatter. And I highlighted two charts that proved there was no way we were headed for a double-dip recession.

Well, it looks like it’s time to whip those charts out once more and bring them up-to-date, so we can put all this double-dip recession talk to bed. Again.

This Indicator Says There’s Zero Chance of a Double-Dip

One of the best indicators to determine the probability of a recession is the Treasury spread – specifically, measuring the difference in yield between 90-day Treasury bills and 10-year Treasury bonds.

The calculation allows us to construct a yield curve. And as the New York Fed reveals: “Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity.”

So how do you read the yield curve? Simple…

~ Steep Yield Curve: Points to economic growth.

~ Flat or Humped Yield Curve: Signals uncertainty.

~ Inverted Yield Curve: Points to an economic slowdown or recession.

With 90-day Treasury bills yielding 0.04% and 10-year Treasury bonds yielding 3.14% percent, there’s only one way to interpret the current yield curve. It’s steep.

If there were any chance of a recession occurring, the yield curve would be inverted… just like it was 18 months before the last recession hit. But it’s not.

Now let’s turn to our second recession-busting chart…

Don’t Take These Recession Odds to Vegas

The Fed measures the changes in the Treasury spread over time to calculate the probability of a recession in the next year. And it tells the same story as the yield curve…

The Fed’s latest Treasury spread model assigns a 0.60% probability of a recession in the next year. That’s equal to just a 1-in-167 chance.

Now, conspiracy theorists are bound to question anything that comes from the Fed. I get that.

But history doesn’t lie. The fact that previous spikes in the spread indicator accurately predicted other recessions (denoted by the orange bars) proves that this is a reliable gauge and not some concocted piece of propaganda.

Need more proof?

Two More Reasons to Dismiss the Double-Dip

If you’re still not convinced, consider these two additional factors, which similarly downplay any chances of a double-dip recession.

1. Do You Believe in Unicorns?

Double-dip recessions are extremely rare. Over the past 80 years, we’ve only endured one – from 1980 to 1982 – according to the National Bureau of Economic Research.

And over the past 150 years, we’ve only encountered… (wait for it)… three.

Translation: We probably have a better chance of seeing a unicorn before another double-dip recession.

2. A Sea of Black, Not Red:

[ad#article-bottom]If America were heading into a double-dip recession, we’d see the downturn reflected on corporate financial statements. But that’s not happening.

Corporate profits are rising – up 17.1% during the first quarter, with analysts forecasting a 14.8% increase for the full year.

Bottom line: While the economic picture isn’t all rosy – unemployment remains uncomfortably high and the real estate market is still tanking – a double-dip recession isn’t in the cards.

Ahead of the tape,

— Louis Basenese

[ad#jack p.s.]

Source:  Wall Street Daily