The worst is yet to come

Be ready: the worst is yet to come. Financial markets are flashing a key warning sign of a recession, and the global economy is weakening as the U.S.-China trade war intensifies.

All of which is heightening fear about the U.S. economy and about whether the Trump winning streak is nearing an end.

On Wednesday, a rare realignment in interest rates intensified those worries. The yield on the benchmark 10-year U.S. Treasury note briefly fell below the yield on the 2-year Treasury for the first time since 2007.

Normally, investors earn higher interest on longer-term bonds than on short-term ones. Put another way, the government will usually pay more to investors who are willing to lend their money for longer periods.

So when that equation reverses itself — when longer-­term Treasurys pay less than shorter-term ones — economists call it an “inverted yield curve.” An inverted curve suggests that bond investors expect growth to slow so much that the Federal Reserve will soon feel compelled to slash short-term rates to try to support the economy.

In short, it’s a sign of economic pessimism. Inverted curves are, in fact, remarkably reliable harbingers of recessions: They have occurred before each of the past five downturns.

The inversion sent stocks plunging Wednesday, with the Dow Jones tumbling 800 points, or 3%. Still, an inversion says little about timing of a forthcoming recession. On average, an inversion occurs roughly two years before a downturn.

Many economists worry that recession odds are rising. Julia Coronado, chief economist at MacroPolicy Perspectives, sees a 40% probability of a downturn within the next 12 months, up from 30% last month.

Those concerns stem in part from the U.S.-China trade war, which appears to have discouraged many businesses from expanding and investing in new buildings and equipment. It is also harming Germany’s export-led economy, which shrank in the second quarter.

And the Trump administration has essentially acknowledged that its planned 10% tariffs on $300 billion of mostly consumer goods from China would hurt U.S. shoppers. That’s because many retailers would raise prices to account for the higher tariffs on Chinese imports they would have to pay.

On Tuesday, Trump said he would delay, from Sept. 1 to Dec. 15, the tax on more than half those imports to avoid raising prices for holiday shoppers.

Still, for now, most economic signs appear solid. Employers are adding jobs at a steady pace, the unemployment rate remains near a 50-year low and consumers are optimistic.

“I wouldn’t forecast a recession just on the yield curve,” said Eric Winograd, senior economist at AllianceBernstein. “I would want to see other signals that point to that, but we’re not seeing them right now.”