Many economists have been speculating recently about whether (and/or when) a recession is about to strike. And the economy is giving a lot of mixed signals.
It’s been a decade since the Great Recession ended—marking the longest expansion in U.S. history. Stock market prices currently remain close to record highs. Consumer spending remains relatively strong. The unemployment rate remains at its lowest levels in half a century.
The U.S.-China trade war wages on. The global economy is slowing. And despite the historically high prices, the stock market has been extremely volatile as of late.
Are the signs pointing to a coming recession? Maybe. Or maybe not. The truth is, no one knows for sure. But there are some signals that all investors need to be paying attention to.
Here’s what to look for…
The National Bureau of Economic Research is responsible for determining whether the U.S. economy is officially in recession. That organization defines it as such:
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP (gross domestic product), real income, employment, industrial production, and wholesale-retail sales.
“Significant” is hardly a technical term, however. A more precise rule of thumb frequently used by economists is whether the economy has declined by two straight quarters (based on GDP); if it has, it’s considered a recession.
An inverted yield curve: U.S. Treasury bonds are the metric used to measure yield curves. Generally, long-term bonds have higher interest rates than short-term bonds, because investors demand a higher reward for having their money tied up for a decade. The yield curve has inverted when long-term Treasury bonds have lower interest rates than short-term bonds. It indicates that investors don’t have confidence in shorter-term investments, and require a higher interest rate to take on the perceived additional risk.
An inverted yield curve has preceded every recession for the past 60 years. And the yield curve is currently inverted, meaning this indicator is currently flashing red.
For what it’s worth, many economists say this indicator isn’t as powerful as it used to be due to rising short-term interest rates across the globe. But another faction of economists insists this remains a strong indicator.
Rising unemployment: While it’s unlikely to be the first sign, one of the most reliable indicators of a recession is a sudden spike in the unemployment rate. When it rises quickly, it may indicate that a recession is on the immediate horizon… or has already begun.
During the Great Recession, unemployment hit 10%, and during the Great Depression, it was 24.7%. Today, it sits around 3.7%. (The lowest recorded level in history was 3.6% in 1969.) And the country has added jobs for 106 months in a row, representing its longest streak in history.
While the rate of growth has slowed a bit since 2018, jobs continue to be added to the economy. Most economists agree that at a near-historic low, the unemployment rate is a positive indicator against an immediate recession.
Falling GDP: Put simply, GDP is the sum total of the amount of products made and sold over a certain length a time. It’s one of the most important metrics of the health of the economy.
Some fluctuations in GDP are normal. But during a recession, the economy declines and the GDP falls.
In 2018, U.S. GDP grew to 2.9%, and hit 3.1% in the first quarter of 2019. By the second quarter, though, it had dropped to 2.1%.
Many economists are concerned about the impact that the U.S.-China trade war could have on GDP. U.S. exports of goods and services comprise 12% of the national GDP.
Shifting consumer sentiment: Consumer spending is one of the most important indicators of a recession, since it accounts for nearly 70% of the country’s economy.
Although the government shutdown at the beginning of the year dealt it a brief hit, consumer confidence in the U.S. remains high. This makes sense given the low unemployment rate; these two indicators are closely linked, as the former often determines whether consumers are willing to continue spending.
However, an important subset of consumer spending—big ticket items like cars and homes—is beginning to decline. Despite low interest rates making it less expensive to secure a loan, car and home sales both declined about 2% in the first half of 2019 compared to the same timeframe last year.
And since big-ticket purchases have other implications (employment provided by the auto industry, increased spending after a home purchase), a decline in these could herald more troubles to come.
That said, other discretionary spending (vacations, dining out) is currently up.
There are multiple indices that track consumer sentiment data, such as those by the Conference Board and the University of Michigan. Since consumers have a tendency toward being reactionary, short-term fluctuations are no cause for concern.
But drops of 15% or more year over year, though, could be signs that a recession is coming… or already here.