Tips To Spot A US Recession Before It Becomes Official

As the United States approaches a record expansion in July, the conversation is increasingly focused on when everything will end.

Recessions are intrinsically difficult to detect. The Economic Cycle Dating Committee of the National Bureau of Economic Research, a group whose determination of the beginning and end of extensions is considered official, usually waits about a year before making an appeal. When data such as payroll or gross domestic product are clearly visible, a contraction may already have begun.

Fears of a recession eased on Friday as strong retail sales suggested that consumer spending remains healthy. But investors are still expecting a Fed interest rate cut in July, after other recent figures have shown a slowdown in job gains and low inflation, while the president's pricing threats Donald Trump weigh on companies. And the chances of a recession over the next 12 months have gone from 25% to 30%, according to a survey conducted by economists from June 7th to 12th.

Economists are turning to a wide range of data – from government, private and market sources – to try to determine the right moment when things go wrong. Here is a sample:

Yield curve

The yield curve refers to the difference in interest rates between short- and long-term Treasury securities. Most of the time, long-term returns are higher because investors typically require higher returns if they lock in their money longer. However, when short-term rates are higher – a so-called "inverted" curve – economic growth should reverse, as policy rates eventually fall to cushion the slowdown.

The gap between the three-month and ten-year titles has reversed before each of the last seven recessions, making this event a key sign of a future economic downturn. But this is not automatic, and some argue that central bank policies such as quantitative easing have made the curve less a direct predictor.

Credit conditions

Another weather vane controlled by economists is whether borrowing conditions are getting tougher, especially for small and medium-sized businesses. Surveys such as the Fed's survey of former loan officers and the credit requirements of the National Federation of Independent Businesses provide this type of information.

"If the banks are tightening the market because of what they perceive as excesses and increased risks, that sort of thing tends to be a leading indicator," said Joshua Shapiro, chief US economist at MFR Inc.

Feeling of business

Surveys like those from the Institute for Supply Management provide insights into the economic activity of producers. In May, the ISM manufacturing index fell to its lowest level since 2016 but remains above the 50 mark indicating expansion.

The downward trend suggests "that there is persistent caution on the part of companies," said Jesse Edgerton, chief economist at JPMorgan Chase & Co. "We have already found that the decrease in capital expenditures was already manifesting itself, if that translates into a slowdown in hiring. "

The ISM survey also contains sub-indicators to badess what may happen, including new orders and arrears, while anecdotes in the report may indicate risks such as slowing demand or impact negative tariffs. Slow orders can precede layoffs if companies already have free time – or can be manageable if production is already stretched.

Nevertheless, the manufacturing sector contracted in 2015 and early 2016 without leading the economy into recession.

Signs of work

Monthly payroll data are often described as a coincident indicator – they provide a good indication of the health of the labor market in a given month. But as companies stop creating jobs or are eventually laying off workers, economic weakness has already begun.

The initial jobless claims show how many Americans are asking to receive unemployment benefits and can give some idea of ​​the direction that the economy is taking. A significant and sustained increase in the number of jobless claims suggests that companies encourage layoffs and that a recession could soon occur.

An badociated leading indicator is temporary hiring. The logic is that when times are right, companies can hire temporary employees to meet the demand. When times are tough, temporary hires are often the first to leave.

"As long as consumers and services hold, the economy holds too," said Simona Mocuta, chief economist at State Street Global Advisors.

– With the help of Liz Capo McCormick, Rich Miller and Catarina Saraiva.