‘Storm warning’: Here are key indicators that determine if another recession is on the horizon
Economists, for all their expertise, cannot predict exactly when another recession will arrive, how bad it will be or how long it will last. Some recessions feel like a minor cold; the Great Recession, the worst economic event in United States history since the 1929 crash and the Great Recession of the 1930s, felt like viral pneumonia for millions of Americans. But one thing economists can say with absolute certainty is that another recession will arrive sooner or later — it’s not a matter of if, but when. And financial reporter Ben Casselman, in a July 28 New York Times piece, lists some of the main things to look for to determine when another recession might be on the horizon in the U.S.
“Economists are notoriously terrible at forecasting recessions, especially more than a few months in advance,” Casselman asserts. “In fact, it’s possible, though unlikely, that a recession has already begun, and we just don’t know it yet.”
The Great Recession, according to economists, technically started in December 2007. But the crash of September 2008 was when it seriously accelerated.
One of the warning signs to look for, Casselman notes, is an uptick in unemployment — which, he writes, is at a “50-year low” in the United States. And when it comes to recessions, he adds, “even small increases are significant.”
Another economic “storm warning,” according to Casselman, is what economists call an inverted yield curve — meaning that long-term interest rates on financial products fall below short-term interest rates on financial products. So if, for example, banks start offering higher interest rates for a nine-month certificate of deposit than for a two-year or three-year certificate of deposit, it could mean that a recession is on its way. Casselman’s example of yield curve inversion is if “interest rates on 10-year Treasury bonds” start “falling below those on three-month bonds” — which, he observes, “has already happened” in 2019.
“The yield curve is less intuitive than the unemployment rate,” Casselman observes, “but it has historically been among the best predictors of recessions.”
Casselman also cites the index of the Institute for Supply Management (ISM) as something to keep a close eye on. The financial journalist explains that “readings above 50 indicate that the manufacturing sector is growing; below 50, it is contracting.” As of June, according to Casselman, the ISM index was “still in expansion territory, but barely.”
Consumer confidence, according to Casselman, is another crucial way to measure a country’s economic health. And he notes that consumer confidence “has fallen since late last year.”
Casselman wraps up his piece by stressing that when it comes to evaluating the state of the U.S. economy, it’s important to observe multiple indicators.
“No single indicator can tell the whole story of the $20 trillion United States economy, and the measures that performed well in the past might not do so in the future,” Casselman asserts. “So, it pays to keep an eye on a variety of data sources.”