Recession indicator with perfect track record flashing red

The yield curve is blaring a recession warning.

The spread between the U.S. 2-year and 10-year yields on Wednesday turned negative for the first time since 2007. Such a development has occurred ahead of each and every U.S. recession of the last 50 years, sometimes leading by as much as 24 months.

“Historically, the 2-10 has had better predictive ability of recession than equities,” Sri Kumar, president of the Santa Monica, California-based SriKumar Global Strategies, told Fox Business.

“If you depended on equities to tell you whether you are entering into a recession you did not do well. For example, October, November of 2006, exactly one year before the Great Recession began, the 2-10- inverted. Equities did well in the first half of 2008 when we were in a recession and oil prices hit a peak in May of 2008 when we were very much in a recession.

“Do not depend on equities or oil price to tell you that you are in a recession. You’re probably not going to do well as a leading indicator.”

And while a flattening yield curve is typically something investors fear, President Trump earlier this month called on the Federal Reserve to cut rates in order to flatten the yield curve further and spark inflation – something needed to jumpstart a slowing economy.

“They must Cut Rates bigger and faster, and stop their ridiculous quantitative tightening NOW,” Trump tweeted. “Yield curve is at too wide a margin, and no inflation!”

Trump’s call for more Fed rate cuts comes at a time when the economy is slowing as the more than yearlong U.S.-China trade war presses on. The U.S. economy grew at an annualized rate of 2.1 percent Opens a New Window. in the April to June period, down from 3.1 percent in the first quarter.

But that’s not the only evidence of a slowing economy. A team of Bank of America Merrill Lynch economists led by Ethan Harris say three of the top five economic indicators of the business cycle are “flashing yellow” and are near levels consistent at the start of previous recessions.

Specifically, the team points to weakness in auto sales, industrial production and aggregate hours worked. However, they say arguably the “most reliable early indicator,” initial jobless claims, remains at a low level. 

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