Economic Indicators Implying A Recession:
The definition of a recession is currently a debatable topic. Here are the economic indicators that affect a recession and when the FED can't deny that we are in one.
First a short lesson. Indicators can be described in two ways, leading and lagging. A leading indicator occurs before an event and can be used to attempt to forecast future results. A lagging indicator usually details events that have already happened but are yet to show. This is of major importance in the current financial markets. As it is argued that we aren't in a recession, the indicators that aren't showing it, are lagging indicators. This makes the coming months incredibly important.
Now to the relevant indicators:
The Yield Curve: This is a leading indicator, and the 2-year and 10-year yields inverting is a sign of a future recession. This does occur at times when it hasn't been preceded by a recession, but every time there has been a recession it has occurred before. The 2-year yield increases to above the 10-year yield in US treasuries. This happens as market participants rush to longer-term bonds for protection, raising their prices but reducing yields, as they have an inverse relationship to each other. It is also an indication that rates could be cut to fight the reduced economic growth we see in a recession.
Unemployment Rate: Currently it sits at 3.6%, an incredibly low unemployment rate. During the last three recessions (2000, 2008, 2020) it has lagged and then increased, sharply. Look out for this.
GDP Growth: The technical definition of a recession is two-quarters of negative growth. Every time this has happened, there has been a recession, and so it should also indicate it now also. This appears to be a leading indicator.
Consumer Confidence & Spending: Consumer confidence refers to how confident people feel with their current financial position, and if they think this will continue or get worse. Consumer confidence has been dropping, and so looks like a leading indicator. Protecting oneself from a downturn becomes more important than consumerism, and buying things we don't really need. Consumer spending in June actually increased. The July reading will be very important to see if we get a reduction.
Durable Goods Orders/Manufacturing: When business is good, there will be more demand. Dropping consumer confidence could spread to manufacturing and would be seen in reductions here. However, this hasn't been seen yet. Orders rose 1.9% in June.
Other events that occur in recessions:
- Companies letting staff go.
- Increase in the default rate.
So, we have seen an inverted yield curve, negative GDP growth for two quarters, and dropping consumer confidence. The jobs market, the housing market, and consumer spending are where I'm looking next.
The housing market has been negatively impacted by rising mortgage rates, reduced home sales, and reduced mortgage applications over the last few months. This all depends on when the FED pivots and reduces rates, and it is a question of if something breaks before.
The effects of raising interest rates to counter inflation are seen in a lagged effect. Raising interest rates too quickly can cause a deeper recession, but not raising them quickly enough does nothing to impact inflation. This is why the markets seem slightly chaotic currently. The market is made up of countless individuals, all of whom think they know what's going on. I think if we're honest with ourselves, we're all just confidently guessing, including the FED.
Finally, this is all my opinion and thinking. The jobs market could remain incredibly strong and we don't see a recession, by the larger definition. This is everything I will be looking at to make informed decisions in the markets. If you want more threads like this one, drop a follow. I have a massive list of topics I want to talk about, and this will be the best place to see them.