How to spot the warning signs of a looming recession
Last year I wrote a blog post explaining that a recession may not be far away. A recession is 2 consecutive quarters of negative economic growth. The indicators at that time were still questionable. But fast forward to today and wow, the signals have become much clearer! Here are 10 economic indicators that strongly suggest a U.S. recession could be imminent.
- Inverted yield curve
- Unemployment rate reaching an inflection point
- The long term unemployment is flattening out
- Declining GDP growth
- Lower expectations for corporate earnings
- Manufacturing index PMI falls to 10 year low
- Global uncertainty index at all time high
- Declining Cass Freight Index
- The Fed Bank of New York drastically raised the likelihood of a recession
- Rising auto loan delinquencies
Additional breakdown of each of the 10 indicators below.
The yield curve has inverted
The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The yield curve tends to get flatter when the economy reaches the end of an expansion cycle. The vertical gray bars on the graph represent periods of recession. How reliable is this indicator? Over the last 50 years, every recession was preceded by a yield curve inversion. 😮 The graph dropped to below 0% earlier this year in March, officially inverting the yield curve. According to Credit Suisse, a recession occurs about 22 months on average after a yield curve inversion.
The unemployment rate is bottoming out
A lower unemployment rate is good for the economy. But at the end of every full employment cycle is a sharp increase in the civilian unemployment rate, usually accompanied by a recession. When we last looked at this graph in 2018 the unemployment rate was at 4% and heading down. Today it is lower at 3.7%, a 50 year low in fact. Practically speaking it cannot drop much more than this. Historically we can see in the chart that after the lowest point in each employment cycle, the unemployment rate shoots up abruptly, usually coinciding with a recession.