One of the most reliable indicators of a recession occurred recently, causing investors across the globe to worry that the U.S. economy is starting to slow down. The sign: an inverted yield curve. What does that mean? And more importantly, what impact will it have on consulting opportunities?
What is an inverted yield curve?
The yield curve is a graph depicting yields on all of the U.S. Treasury bills ranging from short-term to long-term. Typically, it slopes upward, because investors demand higher returns when they hold a note or bond for a more extended period given the risk of inflation and other uncertainties.
An inverted curve occurs when long-term debts have a lower yield than short-term debt. This can signal a couple of things. First, an inverted curve may happen when the Fed has been raising short-term interest rates because a tightening monetary policy is slowing the economy. It can also signal that investors are worried about future economic growth and driving demand for safe, long-term Treasury bills, pushing down long-term rates.
On Friday, March 22, 2019, the yield on the U.S. 10-year Treasury note dipped below the yield on the 3-month paper. According to Reuters, the U.S. Treasury yield curve has inverted before each recession in the past 50 years. The curve has offered a false signal only once. Historically, a recession follows anywhere from six months to two years after an inverted yield curve appears.
What does an inverted yield curve mean for the finance industry?
Recession poses potential difficulties for banks, businesses, and individual investors, but it can also create opportunities for consulting. Here are a few ways a possible recession can benefit the temporary professional labor force:
Businesses cut costs.
During a recession, companies invariably look for cost-cutting opportunities. They may outsource more work to independent contractors and consultants. Businesses also tend to worry about making long-term commitments during a recession. Instead of hiring permanent employees, they turn to temporary professionals to help get projects done.
Even in a tough economy, as Jim Cramer, host of Mad Money on CNBC, says “there’s always a bull market somewhere.” During the Great Recession of 2007-2009, consultants who focused on corporate restructuring did well. Now might be a good time to start building expertise in that area.
Businesses want to boost growth.
During a recession, companies may be focused on cutting costs, but after a downturn, their attention turns to growth – everything from mergers and acquisitions to adopting new technologies.
An Eye on Future Opportunities During a Recession
While we can look ahead to a potential recession and identify opportunities that may come from it, remember it’s easier for business owners to make good decisions when they don’t need the money. Currently, sustained revenue and profit growth may be masking inefficiencies in a business’ day-to-day operations, making it easy to put off hard decisions like expense management and process improvements.
Now, when organizations don’t necessarily “need” the money, but are hearing the same recession rumors as everyone else, the time is right for them to start making decisions in support of long-term sustainability. If they way until they are feeling the pressure in the heat of a recession, it will be harder to invest in evaluating vendor relationships and operating procedures to ensure the business is running efficiently. That’s a tremendous opportunity for consultants that doesn’t depend on the fortune-telling power of an inverted yield curve.