Are We In A Recession? The Signals Say Yes
Are We In a Recession?
When we think of a recession, we need to think of it as having a fever when we are sick. A fever is your body’s natural way of fighting off infection. Similarly, a recession acts as a corrective mechanism for an imbalanced economy. Your body spikes its temperature to kill off harmful agents, then gradually returns to normal once the infection is gone.
A recession is typically defined as two consecutive quarters of negative GDP growth. However, it also includes rising unemployment, declining consumer spending, and overall slowing economic activity. While painful, recessions can help reset economic imbalances and pave the way for future growth.
Just as your body has a natural balance, so does the economy. When parts of the economy become misaligned—whether due to over-leveraged banks, speculative investments, or other factors—a recession often follows to restore equilibrium. For example, from 2007 to 2009, poor risk management in the banking sector led to the Great Financial Crisis (GFC).
And just as there are many types of infections that can cause a fever, there are many reasons an economy might enter a recession. But how do we know if we are in one? Certain economic indicators, like a 101-degree fever, have a high degree of accuracy in signaling trouble. Let’s explore these indicators, starting with the Treasury yield curve.
The Inversion of the Treasury Yield Curve
One of the most reliable indicators of a recession is the inversion of the Treasury yield curve, specifically the difference between the 10-year and 2-year Treasury yields.
Treasuries are essentially loans that the U.S. government takes from a variety of investors, including individuals, institutions, and foreign governments. These loans are considered safe investments and pay interest. While the calculation of Treasury rates can be complex, for now, let’s simplify it with an analogy:
If you were to loan $1,000 to a friend named Steve for one day, you likely wouldn’t charge him interest because you’re confident he’ll pay you back quickly. But if you loaned $1,000 to another friend, John, for one month, you might charge him interest to compensate for the higher risk. The longer the loan term, the higher the interest rate, reflecting the increased uncertainty of repayment.
Now consider this: if the interest rate on a 2-year Treasury is higher than that of a 10-year Treasury, what does that tell us? It’s the same as charging Steve more interest than John because you’re less confident in Steve’s ability to pay you back tomorrow. In economic terms, this lack of confidence often signals uncertainty about the economy’s future strength.
Historically, an inverted yield curve has preceded every U.S. recession in the past 50 years. For example, it inverted in 2006 before the Great Financial Crisis and in 2000 before the dot-com bubble burst as seen below:
Check the graph (10-Year Minus 2-Year Treasury): above zero, the 10-year leads; below zero, the 2-year does. Gray bars mark past recessions. Every inversion—2-year spiking past 10-year—has preceded a downturn, often hitting after rates normalize. Today’s curve? Inverted since mid-2022, now easing. History says the lag means we’re likely already in it—official announcements just trail the data, like a fever when you are already infected.
And now, lets talk about the Federal Reserve’s roll in rates:
Fed Funds: The Rate Rollercoaster
The Federal Reserve, often referred to as "the Fed," plays a crucial role in managing the economy. While the Fed operates independently, it influences borrowing costs, consumer spending, and overall economic activity by adjusting interest rates.
When the Fed raises rates, it makes borrowing more expensive for businesses and consumers, which slows down the economy. Conversely, lowering rates makes borrowing cheaper, which can stimulate economic growth. However, there’s a catch: the Fed typically lowers rates significantly during recessions, as we see in the graph below.
Look at the Fed Funds graph: rates climb, then crash—gray recession bars hug those drops. Today, after peaking at 5.33% in 2023, the Fed’s cutting again. Headlines call it “relief,” but history whispers otherwise—big drops signal we’re already sliding. Just like looking in a rearview mirror: recessions get named months after they start.
Near-Term Forward Spread: The Fed’s Crystal Ball
Beyond the traditional yield curve, the Fed itself relies on another key measure: the Near-Term Forward Yield Spread. This indicator compares the current 3-month Treasury bill yield to the expected 3-month rate 18 months from now.
If the expected future rate is lower than today’s rate, it suggests the market believes the Fed will have to cut rates in the future to combat economic weakness—another red flag.
Just like the 10-year vs. 2-year inversion, this indicator has been flashing warning signs for months.
Buffett’s Cash Mountain
If the economic indicators aren’t enough to convince you, consider this: Warren Buffett, one of the most successful investors in history, is stockpiling cash at an unprecedented rate. Buffett has always been vocal about preferring to invest in great businesses rather than hold cash. Yet, at the end of 2024, Berkshire Hathaway reported holding $318 billion in cash—almost double the amount from 2023.
See for yourself:
For his 2024 Annual Report you can get the full copy here.
Why does this matter? In 2007, before the Great Financial Crisis, Buffett increased his cash reserves. In 1999, before the dot-com crash, he held more cash than usual. And now, he’s doing the same thing. Buffett’s strategy is simple: hold cash when markets are risky, then buy assets when prices drop during a downturn. If he’s choosing to sit on the sidelines, it suggests he sees a major economic slowdown ahead.
Final Thoughts: Are We Already in a Recession?
Recessions are often only "officially" declared months after they begin. By the time headlines announce it, we’re already living in it.
The signals are clear:
- An inverted yield curve—a near-perfect recession predictor.
- The Fed lowering rates—a pattern seen in past downturns.
- The Near-Term Forward Yield Spread—flashing warnings.
- Warren Buffett stockpiling cash—a move he’s made before previous crashes.
While no one can predict the exact timing of a recession, the odds suggest we’re already in one—or about to enter one soon.
The question isn’t if a recession is coming. It’s how prepared you are when it does.
What’s Next?
If you want to stay ahead of economic trends and make informed financial decisions, keep an eye on these indicators. The market gives us signals—it’s up to us to pay attention. At Eagle Legacy Planning, we don’t just spot the fever—we fight it. Recessions reset, but they reward the savvy. Ditch fake assets, build cashflow, turn chaos into legacy. Join our Cashflow Group, subscribe to our blog, or book a call today. The signals blare—will you act?
Disclaimer:
This newsletter is for informational purposes only and does not constitute financial advice. The author is not a financial advisor. Always do your own research before making investment decisions.