Marketplace - This is the sound of an inverted yield curve

Episode Date: September 12, 2024

Today in Econ 101, we’re talking yield curve. In a typical economy, the longer a bond’s duration, the more interest it yields. The inverse — shorter duration, higher yields — usually means a recession is coming. We’ve been seeing an inverted yield curve in the U.S. financial system for nearly two years. So, where’s the recession? Also in this episode: Credit card delinquencies hit a 12-year high and we visit U.S. troops preparing for climate change.

On the program today, we'll talk about you, and then we'll talk about me, something a little different. From American public media, this is Marketplace. In Los Angeles, I'm Kyle Risnall. It is Thursday today, the 12th of September. Good as always to have you along, everybody. We are going to start today with a couple of data points, a calendar item, and then a couple of minutes on you, what's on your mind, what you're worried about, and why it

matters. Data point number one is inflation at the wholesale level in the form of the producer price index, released to us this morning by the Labor Department. Producer prices up two-tenths percent month on month, exactly what everybody had been guessing, up 1.7% year on year. So, pretty good. Certainly nothing to change the Federal Reserve's mind about a cut in interest rates when they meet next week. Data point number two, first-time claims for unemployment benefits. Certainly nothing to change the Federal Reserve's mind about a cut in interest rates when they meet next week.

Data point number two. First time claims for unemployment benefits back in the spotlight since we've all gotten just a tad more worried about the labor market. They were up just a bit. Those first time claims were 230,000 of them. Also pretty good. The calendar item is the fresh read we're going to get on the psyche of the American consumer tomorrow, the University of Michigan's latest indices of consumer sentiment.

There has been, on that front, our collective mood, that is, some sobering news lately. Ally Financial reported a couple of days ago that its borrowers are struggling with higher inflation and a cooling labor market. A new report from Deloitte says holiday sales are going to grow at their slowest rate in six years, thanks in part to rising credit card debt. So Marketplace's Justin Ho gets us going with the aforementioned couple of minutes on what it was weighing on the U.S. consumer right now. Consumer credit has been rising pretty consistently over the last year, according to the Federal Reserve. Brian McCarthy with Deloitte's retail and consulting practice, says he's been keeping track of credit card debt and the delinquency rate is starting to look a little concerning. This is recently

hit about 10.9%, which is the highest we've seen in 12 years for credit cards. McCarthy says it's important to put that number into context. Credit card debt is a pretty small fraction of consumer debt overall, but he says there are other signs that people are feeling overextended. Personal savings has also been something we've been tracking and we're seeing that decrease a bit. This week, Ally Financial said that some of its customers are struggling with their auto loans.

Steve Bigger, a bank analyst at Argus Research, says borrowers are having to deal with high prices. Particularly at the low and low to mid income levels, you know, inflation has really impacted that cohort. On the other hand, Baker says lenders in general are still feeling fairly comfortable about the economy. If you have a job, if unemployment is low, or if you lose a job and can replace it fairly easily,

you will stick current on your bills. But we're already seeing evidence that the labor market is cooling down, says Kathy Bostjancic, chief economist at Nationwide. What the consumer is facing is a moderation in labor demand and also a moderation in wage growth. And that means consumers are probably going to keep feeling stretched. That just puts the consumer in a period where they are going to be more cautious with their spending.

But Vosjancik says people will keep shopping if they can find sales or discounts. I'm Justin Ho for Marketplace. On Wall Street today, I got to tell you, it's kind of a parlor game in the markets right now. Is the Federal Reserve going to cut interest rates a quarter of a percentage point or a half? We're not going to know until Wednesday. Details numbers. Y'all know the drill. Of the many things that are being discussed macroeconomically right now, recession is not one of them.

It's not one of them yet, I should say, because there is going to be a recession at some point. That's why the business cycle is called a cycle, right? You've got expansion, a growing economy, and contraction, a shrinking economy. Round and round they go. Anyway, just because we're not really talking about it doesn't mean economists aren't looking out for a recession. And there are a ton of ways they do try to figure out when one might be coming. Recession predictors you might call them. Some of them track imports, some track wholesale prices, some actually track light truck sales and

Statue of Liberty visits. Separately, not together. We talked yesterday about one of the big ones, the SOM rule that tracks the unemployment rate. Today we go to an entirely different part of the economy, the market for U.S. Treasury bonds. It is big, very big, $27 trillion big. It's also global and it's been worrying people for more than a year now. Specifically, we're talking here about the yield curve, which tracks the yields, the interest rates, being paid on U.S. government bonds. Marketplace Stacey Vanek-Smith has the second now of two stories.

The yield curve. It was identified as a recession predictor back in the 80s by Duke economist Campbell Harvey. And Harvey says at its heart, the yield curve is really very simple. The theory behind this indicator is very straightforward, Econ 101. So let's start with the yield part, aka bond yields. Bonds are like little loans you give the government. And these loans have different durations.

Some are four weeks, some are three months, some are 10 years. Looking at you 10-year T-note. And when the time comes, the government pays you back for that loan, plus a little interest. And that interest is called the yield. And it's different depending on the term of the bond. So like a five-year loan? That's got a higher rate than for 90 days. It's the basic laws of FOMO.

When the economy's cooking, investors want to have cash on hand to buy Nvidia stock or splurge on a Tesla cyber truck. So the government has to pay a higher interest rate for those years of lost opportunities. That's the usual yield curve. So we've covered the yield part. Next up, the curve. So if you laid these bonds out in order of duration, four weeks, one year, 10 years, and plotted out their interest rates, their yields, in a healthy duration, four weeks, one year, 10 years, and plotted out their interest

rates, their yields, in a healthy economy you should see a curve, right? Shorter term loans, smaller payout. Longer term loans, bigger payout. And if you converted those interest rates into musical notes and played them, the yield curve should sound something like this, as played on the cello by my editor Amanda Peacher. But lately the yield curve has been singing a different tune. Short term rates are higher than long term rates, so something must be going wrong.

Right now, the government is paying people more to borrow their money for four weeks than for 10 years. Which is weird, right? I mean, shouldn't the government have to pay you for 10 years of no Tesla truck? What is going on? When there's economic uncertainty, people go into the safest asset in the world, and that's the U.S. 10-year treasure bond. So people stop caring about FOMO and start caring about safety. They want to stash their money somewhere and not worry about it for a long time. And because demand is high, the government then does not have to pay as much interest to investors for those long-term bonds. And that is what is happening right now.

So remember, here is what the yield curve is supposed to sound like. And here is today's yield curve. This is the song of the inverted yield curve, and it is a bad economic omen. But it's also been singing this tune for 20 months. So where's the recession? So the yield curve is a leading indicator. With a very long lead. The yield curve typically inverts between six months and two years before a recession

begins. I think we're on the edge of a slowdown that could lead to a recession in the fourth quarter of 2024 or the first quarter of 2025. But there's reasons to believe that is a soft landing recession. Soft landing recession, meaning a few months of mild economic slowdown and then a pretty fast recovery. And the reason for this potentially mild recession, says Harvey, the recession indicators themselves. They've given companies a chance to prepare. Harvey Shiffman If there's a recession, this would be the

most anticipated recession. And we've actually seen actions. Lyle Ornstein Actions like slowing down expansion plans or even doing what Harvey calls preventative layoffs like slimming down staff, cutting unprofitable departments. You might think, well, is that a bad thing? I don't think so. Think of the alternative. We go into a recession and then these companies need to slash. So instead of this 10% layoff, they slash 40% because they're struggling for survival.

And many don't survive, like we saw in the global financial crisis. So this is a trade-off. In other words, Harvey says, the song the yield curve has been singing for the last 20 months has slowed the economy down, but it's also possibly saved us from a much more severe recession. In New York, I'm Stacey Banach-Smith for Marketplace. Justin Ho was telling us about some of the things troubling American consumers right now up at the top of the program, but forget not American businesses because they have troubles of their own.

So we got one of our regulars on the phone to hear how things are going on the other side of the retail counter. Here's Kristin Talheimer-Bingham. She's the co-owner of Dean's Sweets in Portland, Maine. The big news in our world continues to be the rising cost of chocolate. The whole thing is astounding to watch, partly because this has been predicted for years, and now it's finally really happening. The price of chocolate went up in 2023, and then it climbed by 25% in the first half of this year, and then leapt up another 20% in August for dark chocolate and 40% for milk

and white chocolate. There is no sign that these prices are stabilizing, so to get some stability for ourselves we've done our best to purchase as much chocolate as we possibly can so that way we lock in a price as low as possible. We've purchased enough to get us through the end of the year, maybe a little bit more, but we're not able to afford purchasing more than that. So we'll just have to face those costs next year and assess the situation yet again. We've had a major win recently, major to us anyway, which is that we've finally been

able to hire a full-time person. We've been looking to hire somebody since February, and we've had a lot of challenges. For us, it's mostly dealing with a lack of qualified candidates that are also interested in working in a retail setting, and I get that that can be a pretty tough sell. So I'm very happy and relieved to say that we've got our team together for an amazing upcoming fall and holiday season. Kristen Talleheimer Bingham. She's the co-owner of Dean's Sweets in Portland, Maine. Coming up. You're going to get up and you're going to step on this towel. Let me know if you need a hand.

Spoiler alert, I definitely did. First though, let's do the numbers. Dow Industrial is up 235 points today. Just shy of 6 tenths percent, 41,096. The NASDAQ gained 174 points, 1 percent, 17,569. The S&P 500 gained 41 points,%, 55.95 there. Price of gold hit another all-time high today, over $2,500 American dollars an ounce. In gold mining stocks then, Newmont dug up 4.210%. Today, Barrick Gold found 4.25%. Bond prices fell, yielded on the 10-year, T-note went up 3.68%. You're listening to Marketplace.

Hi, this is Phoebe in Honolulu, Hawaii. The economy shapes our lives, and Marketplace helps me keep up with that force without getting bogged down in bad news. I also appreciate their focus on gender and racial inequity and non-climate change. And I love the growth agnostic stories about drivers of our economy other than consumption. Join me in supporting Marketplace with a gift today.

Go to marketplace.org slash donate. This is Marketplace. I'm Kai Rizdal. I've spent the better part of a year or so working on something a little different, something more personal than what I usually do. All right, we rolling? Do you want to give us a self ID first? Sure. My name is Kai Rizdal and I'm the host and senior editor of Marketplace. That's producers Haley Hirschman and Caitlin Esch putting me through my paces. And before that? How far back are we going? To the 80s?

Oh my God. So, um, to the 80s. If you listen to this show or if you follow me on social media, you know a little something about me. I live in LA. I've got four kids. I'm a beer guy. Hazy IPAs only. Thank you very much. And you might have heard me mention that I'm a beer guy, hazy IPAs only. Thank you very much. And you might have heard me mention that I'm a veteran. I spent eight years in the Navy, flying and then on staff duty at the Pentagon. I went to officer candidate school right after college. Graduation was June-ish of 85. Two weeks later, I threw everything I owned in the trunk of my car and I drove from Atlanta down to Pensacola, Florida, and I did 14 weeks of boot camp.

Do you have any first day memories? Oh, yeah. You know, there's spit and polish everywhere, right? I mean, it's ship shape and all that. As you woke up, you open these doors, and you are immediately greeted by the officer candidates who were in their last week of training. But they start yelling and screaming at you about assuming the position of attention, and you get assigned to a room, Spartan military accommodation, obviously,

single bed, single closet, and you're getting to know people, and it comes time to turn out the lights. And then the next morning at 5 o'clock is when you meet your drill instructor. And the way I met Gunnery Sergeant Holter, United States Marine Corps, was that at five o'clock in the morning, he grabbed the trash can and these hallways are linoleum tile and really echo. He grabs a trash can and he throws it down the hallway. Scrape, get your hands out of bed, God damn it, right now.

Get your foot off the ground right now. You know, all of that. I can't do it justice, but that's kind of what it sounds like. And you scramble out of bed, and you go out the door, and you line up at the position of attention, and you start doing whatever Gunnery Sergeant Holter, United States Marine Corps, tells you to do literally for the next 14 weeks.

How do you feel? I guess it was some combination of terrified and excited, right? It's all physicality and following orders and breaking you down. First couple of three days, we all hung in. And then the day we got our head shaved, like three guys bailed after they got their head shaved. And I'm like, are you serious? I just, I was like, what are you even doing? Reflecting on those moments, what

do you make of that training and all those? So look, I think, and again, I think you see this in me to this day, right? Discipline, willpower, grind it out, keep your head down and do your job. Is there any of that that you wish you could unlearn? No. No.

No, not a thing. Not a thing, right? I mean, this is going to sound dopey, and I keep saying this. It is what made me what I am today Right of all the formative experiences in my life, right being a father being a husband having this job That job is what made me Why do you think you stuck it out I Wanted it and I'm stubborn and quitting would have been horrible and what would I have done but it was rapidly becoming part of who I am. It was becoming my identity, right? And here we are 40 years later and it's still, I mean

you can see this, right? It's a little touchy for me to talk about what it means to me. What was the political vibe at the time? What did you think that you would be fighting or protecting? So remember, this was 85, 86, the evil empire, right? Ronald Reagan was in the White House, and it was the Soviet Union. It literally was the evil empire and the Cold War and Ronald Reagan and Gorbachev and all of that.

At what point, if at all, did you hear about climate change? Not once, not ever. Not once, not ever. It just wasn't something that trickled down to the troops. The Pentagon's been funding research into global warming for decades now, as far back as the 1950s. And yet today, the American military belches out more greenhouse gases than any other institution in the world. That's what this reporting project is all about. The new season of our climate podcast, How We Survive, how the institution that shaped me is also going to shape our climate future. The Department of Defense is partly responsible for the climate crisis, but here's the thing.

The military's also on the front lines, so to speak, of having to deal with a fallout. Climate change is a threat to national security. The White House and the Secretary of Defense say that outright. The Biden administration has promised to completely decarbonize the federal government, the Pentagon obviously included, by 2050.

So what does that mean for how the military trains and how the military fights and how it completes its mission? It's four o'clock in the morning. And I am taking, it's an ingestible core temperature sensor. Now I'm gonna have some coffee. Ingestible core temperature sensor is just what it sounds like, a giant pill with a thermometer inside. But for me, it's not just a pill. It's my ticket into this place.

We are going inside to the warfighter performance lab here. Pay no attention to the guy with the microphone. We're on a Navy base in San Diego, California. Captain Eric Welsh is the commanding officer of the Naval Health Research Center. This is where we do physiological and cognitive studies on our warfighters to optimize their performance and increase their resilience. In other words, warfighters, mostly young Marines, come into the lab and do both physical and mental stress tests under what might fairly be called extreme conditions. Doug Jones is the head of the thermal

physiology team. This environmental chamber goes from negative 25 degrees Fahrenheit all the way up to 135. So we can really run the whole gamut here, but we're going to drop it from 110 degrees Fahrenheit down to 34 degrees Fahrenheit. We're also going to get you wet and cold too, so you'll be going through a lot of different things today. Oh my God. All right. Okay. All right. I'm here because I want to understand what soldiers are facing today. Living and working and fighting in temperatures

and environments that are only getting tougher. Environments that are hotter or colder and with less access to water. And I wanna know how research like this could help train them. Go ahead and take a seat. This is just a remarkable feeling, the whole guinea pig lab rat thing.

Doug takes me into a bare metal box for the first test, extreme heat. Oh yeah it's hot. Oh. It's 110 degrees thanks to a bank of red warming lamps up in the ceiling. This is like being in one of those food stations where they put the freaking chickens in the grocery store. There's these IR lamps right? Isn't that what's going on? I walk in a treadmill in that heat for a solid 30 minutes, got a little sweaty, and then I do a cognitive test to see how the heat affects my ability to function. On the face of it it's a simple exercise. I have to differentiate between O's and Q's on a keyboard. Q. God, that was a Q. Computer's

wrong. The whole while I'm doing that, there's a room full of scientists tracking my data. That temperature pill I swallowed is like a tiny computer in my gut. It records and stores 34 hours worth of my core temperature data. So, of course, after the heat test, I get to experience the other extreme. Doug drops that room down to 34 degrees. And after standing there for 10 minutes in shorts and a t-shirt, it's 10 minutes in a tub of 50 degree water. Whenever you're ready.

The more you talk, the less I'm doing this. Right away. Holy. It's not great. Ooh, I can feel my muscles tensing, right? My thigh muscles are very tense right now. Mostly because I'm jamming them together. So what's going on right now is basically your cold temperature receptors are responding.

Yes they are. Sorry. And so you are feeling intense sensations of cold, probably some pain I'd imagine. Do you want to know the time or no? No, absolutely not. So you can think about all the Marines that have gone before you in this. Holy s***. I don't understand doing this for 90 minutes.

I bet you'd get deep inside yourself. After what were, honestly, 10 of the longest minutes of my life, You're going to get up and you're going to step on this towel. even standing up is difficult. Let me know if you need a hand. Dripping wet, still in that bare metal room, still at 34 degrees, it's time for the next stress test. Can you hear the gun shaking? It's been 38 years, not since boot camp, since I shot a weapon.

But with a laser modified M4 rifle in my hands, Oh come on, Kai! I take aim at a figure that appears on a snowy mountain landscape on a wall-sized screen. Definitely cannot feel my fingers anymore. There is, mercifully, a hot shower waiting for me, although the shaking and the shivering continue for a good long while, as the thermal team and I go over my results.

All right, so we're gonna walk you through your data that you produce here in both the hot and cold environments. I did all right overall, better in the cold than in the warm, funnily enough. But it's not really about my results. This whole day is about getting just a glimpse of what soldiers and Marines are gonna have to be training for in the future, because climate change is changing

where and how the military operates, hot or hot, cold or cold in unexpected parts of the world. Here's Captain Eric Welsh one more time. You can be on a ship and be too cold. You can be on a ship and be too hot. So the climate of the world today, the global climate offers many, many different conditions that really put people at stress. In other words, the changes are already happening. Humans are not meant to work in really cold conditions or hot conditions, and that's true right now. We operate from the Middle East to the Arctic

and all over the world. This is what we've been doing for the past year or so, going, if not quite all over the world, then definitely far and wide, trying to understand what climate change is gonna mean for America's national security. Because the conditions and the consequences of how the Pentagon operates in a warming world

are only gonna be getting more extreme. I don't take myself off the air to do big projects like this very often. I love my day job, I say that all the time. But this one was different. It needed more time than I get in the standard broadcast clock for this show. And it needed me to be more me.

We're going to have more segments coming up on the air over the next month or so. But in the meanwhile, please do follow our climate podcast, How We Survive, obviously on the platform of your choice. Episode 1, Me, the Military, and How Climate Change is a Threat Multiplier, is out now. And we are out of here. John Buckley, John Gordon, Noya Carr, Diantha Parker, Amanda Peter, and Stephanie Sieck are the marketplace editing staff. Amir Bibawe is the Managing Editor. I'm Kyle Rizdal. We will see you tomorrow. This is APM.

Hi, this is Emily from Paxton, Nebraska. I live in a rural area where the written local news has been outsourced to a bigger city, and the local newscast is not very good. I enjoy listening to Marketplace programs because they are informative and thought-provoking. I learn about things, places, and people that I would not have found anywhere else. I am so grateful for Marketplace's dedication to bringing the news to the people. Join me in supporting Marketplace with a gift today. Go to marketplace.org slash donate and thank you.