The Fourth Horseman of the Next Recession Approaches

By Campbell Harvey

March 12, 2019
Professor Campbell Harvey studies the yield curve as recession predictor

A recession indicator with an impressive record recently moved into the red.

When the yield curve inverts – meaning short-term interest rates are higher than long-term rates for at least a full quarter – recession occurs within 12-18 months.

That’s what I found in 1986 while at the University of Chicago, and there have been no false signals in the modern era. The out-of-sample evidence also validated the model. Even the global financial crisis was foretold by an inverted yield curve.

Since March 7, the five-year yield has been lower than the three-month Treasury bill yield. If it stays that way for a full quarter – not merely a few days or a few hours – then the model predicts recession will follow.

I consider the yield curve the last of four horsemen of the recession to rear its head.

The first horseman was revealed in a recent Duke-CFO survey, which found half of CFOs are planning on a recession at the end of 2019 or first part of 2020. Eighty-two percent believe a recession will start by the end of 2020. Their job is risk management, and they are overwhelmingly convinced a recession is imminent.

The second horseman is the realization of anti-growth protectionism. The bluster of last year had no real impact on our economy. However, the effects are now more than words – they are decreased trade opportunities. The most famous appearance of the second horseman was the Smoot-Hawley tariffs, which are widely believed to have triggered, deepened, and extended the Great Depression. Don’t just focus on the U.S.-China tit-for-tat. Probably the greatest trade threat is Brexit, expected in March.

The third is market volatility. This horseman delivers a lot of false prophecies. For example, market volatility spiked during the greatest daily drawdown in modern S&P history, Black Monday in October 1987 – but there was no recession.

This is exactly the reason there are four horsemen – not one. But the National Bureau of Economic Research marked the close of the global financial crisis in June 2009. The average time to recession in the modern era is 58 months – we are at 115 months.

The clock is ticking. And if the yield curve remains inverted for a quarter, all four horsemen will be riding. Beware.


Campbell R. Harvey is Professor of Finance at Duke University and a former president of the American Finance Association.


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