Economist Studying Financial Crises: Two Major US Indicators Flash Red, Recession "Could Arrive at Any Moment"

Tuomas Malinen, a Finnish economist specializing in financial crisis research, warns that the US economy is standing on the edge of recession. In his view, the two most alarming signals are the rising number of corporate bankruptcies and the private sector yield curve nearing "inversion to zero."

Malinen stated in his Substack column this week that after systematically reviewing multiple financial market and macroeconomic indicators, he concluded that despite strong stock market performance and seemingly favorable surface-level economic data, the US economy is in a precarious position. He admitted he could not provide a specific timeline for the recession but used severe wording:

"We must acknowledge that the floor of the US economy could collapse at any moment."

This assessment diverges significantly from mainstream Wall Street expectations. Economists at the Federal Reserve Bank of Atlanta currently project that US GDP will expand by 4% in the third quarter, and most market forecasters expect economic growth to continue, with the AI boom lasting for several more years. Malinen's pessimistic stance represents a minority voice.

Bankruptcies Hit Post-Pandemic High

Corporate bankruptcy data is one of the core indicators Malinen monitors. According to data from the US Courts Office, there were over 600,000 new bankruptcy filings in the 12 months ending this June, a 12% year-over-year increase, marking the highest level since the pandemic.

Malinen pointed out that although the current scale of bankruptcies remains far below the peaks seen during the 2008 Global Financial Crisis or after the burst of the dot-com bubble, the continuous upward trend since the post-pandemic low constitutes a warning signal that cannot be ignored.

Private Sector Yield Curve Nears "Inversion to Zero"

The second indicator Malinen focuses on is the private sector yield curve, specifically measured as the spread between the yield on Baa-rated corporate bonds with maturities of at least 20 years and the bank prime loan rate (the interest rate banks charge their most creditworthy institutional customers).

Currently, this curve is approaching "inversion to zero"—meaning corporate bond yields are about to exceed the bank prime loan rate. This may stem from heightened investor concerns about the risks of holding corporate bonds, or it may reflect rising expectations for overall interest rates; both scenarios exert pressure on risk asset prices.

Malinen noted that similar shifts from negative to positive spreads occurred before the pandemic-induced recession, the Global Financial Crisis, and the early 2000s recession. In his view, the current signal presages that "a US recession is imminent."

Bright Spot in Manufacturing Orders Fails to Mask Underlying Worries

The third indicator analyzed by Malinen—the ISM New Orders Index for Manufacturing—is the only variable in his framework releasing a positive signal. The index rose to 56.7 in July, remaining in expansion territory for the seventh consecutive month, which Malinen attributes to the boom in data center construction.

However, he views this bright spot with caution and interprets two layers of hidden dangers from it: first, prosperity in the US economy is confined to a very small corner; second, the boom in this sector could end abruptly at any time. He compares the AI boom to the dot-com bubble, warning that "if this judgment holds, it indicates that the US economy is highly likely to plunge suddenly into recession after the AI trade collapses, a scenario perhaps identical to the aftermath of the dot-com bubble burst."