Ed Yardeni, a senior Wall Street strategist and former Fed economist, recently wrote that "Don't believe in the inverted yield curve, the roaring 1920s market is booming." Here are his main points:

The US economy continues to grow and the labor market remains strong.

Over the past two years, the hard landing school of economy has put forward numerous theories and charts to prove that raising interest rates will inevitably plunge the US economy into a recession abyss. Today, the stubborn recessionists insist once again that their long-standing recession prophecy is about to come true. Some even declare that a recession has already arrived.

However, all these predictions have proved to be wrong so far. US economic growth has not stopped, and the labor market remains strong. Both the S&P 500 index and the Nasdaq index have reached new highs, despite the Federal Open Market Committee (FOMC) telling market participants that there will be at most one rate cut this year.

At the beginning of the year, the market expected as many as seven rate cuts from the Fed. The hard-landing school believed that the Fed must cause a recession to curb inflation by tightening monetary policy. When inflation turned out to be shorter than they expected, they in turn advocated that the Fed must significantly loosen policy to avoid a recession.

The common factor behind these pessimistic predictions is the dependence on "Technical Analysis of Macro-Economic Data" (TAMED). In the past interest rate cycle, the cause-and-effect relationship and correlation have all lit up red lights, so a recession seems inevitable.

The hard landing faction correctly pointed out that after past Fed tightening cycles, financial crises often followed, leading to a general credit squeeze and recession. However, the US and global economies after the pandemic are very different from those before, and many recession indicators that were previously highly accurate may now mislead.

Here are a few reasons why TAMED predictions have failed.

Since December 2021, the Leading Economic Index (LEI) of the US Economic Consulting Bureau has plummeted by more than 14% as of May this year. Meanwhile, the Coincident Economic Index (CEI) has hit new highs in May and has steadily risen over the past few years, quickly recovering to pre-pandemic trends. Since July 2021, despite the pessimism predicted by the LEI, the CEI has repeatedly hit new highs.

Given the close relationship between the CEI and the S&P 500 earnings expectations (the latter touched a historical high of $260.02 per share in the week of June 13), the CEI is likely to reach a new record in May. The year-end target for expected earnings is almost $270 per share.

By contrast, the LEI may continue to decline. Part of the reason why its recession prediction has failed is that five of its 10 component units are related to manufacturing and construction, so the LEI is highly correlated with the national manufacturing purchasing managers' index (M-PMI). When the US economy is more focused on industry and more labor is engaged in commodity production, the LEI is a better tool for predicting economic recession. Today, however, employment in manufacturing, mining and construction accounts for only 10% of the total, down from one-third in the early 1950s. Today's US economy is more oriented towards the service and technology sectors.

One component of the LEI that has attracted much attention in the previous cycle and has shown accuracy in predicting a recession is the inverted yield curve. Though sometimes erroneous, it once accurately predicted a US recession. However, as the economy moves from industrial to digital, the LEI's directionality has been weakening.

Former Fed economist Ksom proposed a relatively new recession model - the Sam rule, which is now widely followed by the market. According to the Sam rule, if the average unemployment rate over three months is 0.5% higher than the lowest point in the past 12 months, it indicates that the economy is in or about to enter a recession. As of May, the Sam rule indicator was 0.4%, just 0.1% below the alert threshold.

We believe that simple moving averages are not good economic forecasting tools - the macro-environmental characteristics of each cycle need to be taken into account. The Sam rule only tells us that there will be an initial rise before the spike in US unemployment rate in the past. We believe it is quite obvious. There have also been several occasions when the Sam rule has come close to or actually triggered a recession, such as in August 2003, but no recession occurred at that time.

Both the Sam rule and other TAMED indicators ignore the impact of structural changes between economic cycles. For example, many economic hard-landing theorists have overlooked demographic changes after the pandemic, when many baby boomers retired early, leaving a large number of jobs for young workers to fill.

In conclusion, economists may continue to search for simple rules to predict whether a recession is imminent, especially given the reputation that comes with accurately predicting a recession. We will continue to pay attention to the details behind the economic headlines. So far, these details have led us to believe that inflation will continue to ease, economic growth will continue, and the roaring 2020s will remain vibrant.