Six Indicators of a Possible Recession

We’re getting a lot of mixed messages about a coming recession. On one hand, the Gross Domestic Product is higher than expected and the unemployment rate is at a historic low. We’ve been seeing a lot of economic growth that suggests we’re headed in the right direction. But on the other hand, many experts suggest we are at risk for a recession. 

While most experts say America isn’t in a state of panic right now, it’s helpful to be aware of recession indicators. Experts say that there’s no best indicator, Bankrate mentions the more widely watched statistics are yield curve, confidence indexes, employment data, The Federal Reserve Bank of New York’s recession probability model, Leading Economic Index, and Gross Domestic Product. 

Yield curve is one of the most closely watched recession indicators, according to Bankrate. A yield, simply put, is the interest rate on a bond, also known as Treasury. The curve compares the maturity of loans and how they change over time. Interest rates are higher for longer maturity. The yield curve is usually positively sloping, but sometimes the curve inverts. When this happens, investors are saying it’s riskier to hold a short-term bond than a long-term. According to Dan North, chief economist at Euler Hermes North America, yield curve inversions have preceded recessions for the past 50 years.¹  

Confidence indexes are another popular measure because sometimes recessions are self-fulfilling. The way people feel about the economy says a lot about what could happen. When businesses and consumers are cynical about the future, they’re less likely to spend. There are several different confidence indexes published regularly. Bankrate suggests the University of Michigan’s monthly consumer sentiment index, The Conference Board, and Bloomberg’s weekly consumer comfort index. Experts inform that monthly changes don’t matter so much as the yearly, long-term changes.  

Economists also like to look at employment data. Big numbers such as unemployment, which is the lowest it’s been since 19691, are good indicators, but another measure to look at is hours worked. Ryan Sweet, director of real-time economics at Moody’s Analytics, says “It’s a decent leading indicator. When the economy slows, businesses are getting worried about future sales. The first thing they cut are hours.” 

The Federal Reserve Bank of New York’s recession probability model is built based on the 3-month and 10-year yield curve and is released monthly. The current probability of a recession in the next 12 months is approximately 25%. 30% is the rate where we start to see cause for concern. 

The Leading Economic Index (LEI) is one of the few economic indicators that looks forward, rather than reporting past data. The Conference Board, who also publishes a confidence index, publish an index composed of 10 datasets that predict the direction of the global economy with indicators such as unemployment insurance claims and common stock prices.  

Gross Domestic Product (GDP) is another measure that pairs well with experts’ projections. The GDP measures the market value of goods and services, however it does tend to fluctuate. Comparing it with other measures helps gain an idea of if it’s cause for concern or just general fluctuation. The GDP is currently much higher than experts had projected. For more details on GDP growth, check out our blog post here.  

While remaining aware of these indicators can be helpful, ultimately, as investment strategy analyst at the Wells Fargo Investment Institute Peter Donisanu says, predicting a recession is “a fool’s game.” No one is capable of predicting a precise time a recession will hit and often times it takes a while to even notice. According to Bankrate, “The National Bureau for Economic Research’s Business Cycle Dating Committee is responsible for determining when a recession officially starts and ends. The last recession started in December 2007, the committee determined, but they didn’t officially declare this start date until a year later.” This is a protection against prematurely declaring a recession. Experts remind that not all recessions are created equally. Whenever we face another recession it is unlikely that it will be as bad as the last. 

Sources: 

1. https://www.bankrate.com/personal-finance/smart-money/watch-these-indicators-know-when-recession-could-be-coming/   

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