The price of oil fell by nearly 74 percent on a year-over-year basis in April, as lowered global demand continued to keep prices low during the month. This is the largest year-over-year decline on record, highlighting the effect that lowered demand has had on prices. The average price of oil fell from $26.46 in March to $16.61 in April, marking the largest monthly decline on record. This brought the average price of oil to its lowest level since 1999. Typically, lowered gas prices are a boon to consumers; however, with much of the country sheltering at home and limiting travel, the benefit was likely minimized during the month.
Going forward, sustained oil prices at these levels signal a risk, with the energy industry being massively disrupted, as we saw back in 2015. While lower prices would normally have also generated an offsetting stimulus, as consumers spend less to drive, the shutdown of the economy has eliminated that. Given the continued weakness in prices in April, we’ve downgraded this indicator to red.
Signal: Red light
The price of money. We cover interest rates in the economic update, but they warrant a look here as well.
After spending the fourth quarter un-inverted, the yield curve briefly re-inverted in January through February, un-inverted again in March, and remained un-inverted in April. This un-inversion was driven by a sharp drop in short-term rates, which in turn was caused by the Fed’s decision to cut the federal funds rate to effectively zero percent in March. The yield on the 3-month Treasury remained largely range bound in April, falling from 0.11 percent at the end of March to 0.09 percent at the end of April. The 10-year yield also declined slightly during the month, down from 0.70 percent to 0.64 percent.
While an inversion is a good signal of a pending recession, it is when the gap subsequently widens to 75 bps or more that a recession becomes imminent—which is what happened in 2008 and what has just about happened again. With the spread near the critical level, we are leaving this indicator at a red light. In conjunction with other monetary and fiscal policy actions, the current spread levels clearly represent a risk.