Conditions for a Recession
After two plus years of the COVID-19 pandemic and other economic factors, the US Economy seems poised on the brink of the next recession.
Although recessions are notoriously hard to predict, history shows that economic cycles exhibit consistent symptoms leading up to a recession. Sometimes a mix of policy decisions and an overextended economy can tip us in to a recession, and other times geopolitical shocks - such as a global pandemic - can curb growth. Although it is very difficult to say in advance, we can look to past data and try to find common trends. Based on history, here are five leading predictors for recessions:
1
Tight Labor Market
One leading indicator of a recession is a tight labor market, where unemployment is so low that it prompts the Federal Reserve to raise rates in order to combat wage and price inflation. The unemployment rate is currently hovering just around 3.6% and the Federal Reserve has raised the benchmark rate several times to curb inflation.
2
Federal Reserve Rate Hikes
Leading up to past recessions, the Fed has raised rates to cool the labor market and get ahead of inflation. Sometimes, these rate hikes inadvertently push the economy into a recession. In 2018 and 2019, the Federal Reserve raised rates, but have recently slashed them due to COVID-19 related economic issues.
3
Flattening Treasury Yield Curve
One of the most consistent predictors or recession is an inverted or flat Treasury yield curve, where there is little difference between short-term and long-term rates for bonds. In March of 2022, the yield curve inverted.
4
Leading Indicators Decline
The Conference Board Leading Economic Index (LEI) is a tool that measures 10 key variables, such as other indexes, interest rates, consumer expectations and much more. While it is not always accurate as a predictor, growth in the LEI typically slows year-over-year heading into a recession and then typically turns negative a few months out.
5
