Lately we've all been hearing a lot about the possibility of a recession.
However, that is just a guess. We need data that can give us a clearer picture than a guess.
The 10 indicators below will help you assess the possibility of a recession.
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I. Group of economic growth indicators
1. Leading Economic Index
The Leading Economic Index (LEI) is a composite economic indicator used to predict future economic trends. It is a composite of a variety of economic indicators, such as new orders from manufacturers, unemployment claims, interest rates, and other financial factors.
LEI increases over the months => On the rise.
LEI decreases over the months => Recession or economic slowdown.
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2. ISM Manufacturing PMI Indicator
The ISM Manufacturing PMI (Purchasing Managers' Index) is a key indicator measuring the health of the manufacturing sector in the United States. It is compiled based on a survey of purchasing managers in the manufacturing industry, assessing factors such as output, new orders, employment, inventories and supplier deliveries.
A prolonged PMI < 50 usually indicates a recession. PMI > 50 indicates expansion in manufacturing activity.
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II. Consumer confidence index group
1. Retail sales
The Retail Sales Index measures the total value of goods sold by retailers over a specific period of time, usually monthly. It reflects the spending power of consumers and is an important indicator of the overall economic situation. Retail sales are a measure of consumer spending. In the US/EU, personal spending accounts for 70% of total GDP.
Weak consumer financial health → Tight spending → Falling retail sales → Business sales decline → Bankruptcy → Workers lose their jobs → Recession.
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2. Actual retail sales by year
Real Retail Sales Year-over-Year Percent Change is a measure of the total value of goods sold by retailers, adjusted for inflation, over a one-year period. It reflects changes in consumer spending over time, removing the effects of rising or falling prices.
Inflation usually occurs when this index is <0%.
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3. Consumer price inflation CPI
The Consumer Price Index (CPI) is an index that measures the average change in the prices of goods and services purchased by consumers, over time. It is the most common measure of inflation in an economy.
A continuous decrease in CPI over months can be a sign of recession.
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4. Personal consumption expenditures PCE
Personal Consumption Expenditures (PCE) is an index that measures total consumer spending on goods and services in an economy. It is an important indicator to assess the level of household spending and its contribution to GDP.
History has shown that a sharp decline in PCE can be a sign of a recession.
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II. Group of financial market indexes
1. Inverted yield curve
An inverted yield curve is when short-term bond yields are higher than long-term bond yields. Typically, long-term bond yields are higher because risk increases over time, but when the yield curve inverts, it indicates an anomaly in the market.
An inverted yield curve is often seen as an early warning sign of a recession. It shows that investors are losing confidence in the long-term economic outlook and are willing to accept lower yields for long-term investments.
While not every inversion leads to a recession, every recession since WW2 has been preceded by a yield curve inversion.
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2. Expectations of interest rate cuts
Interest rate cut expectations are market expectations that the US Federal Reserve (Fed) will cut interest rates in the future. This usually happens when the economy is weakening or at risk of recession, and rate cuts are seen as a way to stimulate economic growth.
Over the past 60 years, every time the market has expected at least a 2% interest rate cut, a recession has occurred in the United States.
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IV. Labor market index group
1. Unemployment rate
The unemployment rate is an indicator that measures the percentage of the labor force that is looking for work but has not found a job in a given period of time. It reflects the employment situation in the economy.
A low rate usually indicates a strong economy, with many people employed, while a high rate can indicate a recession or tight labor market. In the past, whenever the unemployment rate rose after a sharp decline, a recession often followed.
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2. Sahm recession index
The Sahm Recession Index is an economic indicator developed by economist Claudia Sahm to help detect early economic recessions. It compares the current unemployment rate to the average unemployment rate over the previous 12 months. When the current unemployment rate rises by at least 0.5% above the average over the previous 12 months, the index signals a possible economic recession.