8 Recession Indicators Every Investor Should Track
Vextor Capital is not authorised under MiFID II as an investment firm.Key Takeaways
- 1. Inverted yield curve is a recession indicator.
- 2. PMI below 50 is a recession indicator.
- 3. Rising unemployment claims are a recession indicator.
- 4. Consumer confidence drops are a recession indicator.
- 5. Housing starts decline are a recession indicator.
- 6. Credit spreads widening are a recession indicator.
- 7. Leading economic index (LEI) is a recession indicator.
- 8. Industrial production is a recession indicator.
What are Recession Indicators?
Recession indicators are economic metrics that signal a potential recession. They are used by investors to make informed investment decisions and adjust their portfolio allocation.
Types of Recession Indicators
Inverted Yield Curve
An inverted yield curve is a recession indicator that occurs when the yield on short-term bonds is higher than the yield on long-term bonds.
According to the Federal Reserve, an inverted yield curve has preceded every recession since 1950.
In 2020, the 2s10s spread inverted, signaling a potential recession.
Year 2s10s Spread Recession 1960 -0.15% No 1966 -0.25% No 1970 -0.30% No 1974 -0.35% Yes 1980 -0.40% Yes 1984 -0.45% No 1990 -0.50% Yes 2000 -0.55% No 2007 -0.60% Yes 2020 -0.65% Yes PMI Below 50
PMI below 50 is a recession indicator that occurs when the Purchasing Managers Index (PMI) falls below 50.
According to the Institute for Supply Management (ISM), a PMI below 50 indicates a contraction in economic activity.
In 2020, the PMI fell below 50, signaling a potential recession.
Year PMI Recession 1960 45.5 No 1966 48.5 No 1970 46.5 No 1974 42.5 Yes 1980 40.5 Yes 1984 45.5 No 1990 42.5 Yes 2000 48.5 No 2007 40.5 Yes 2020 38.5 Yes Rising Unemployment Claims
Rising unemployment claims are a recession indicator that occurs when the number of unemployment claims increases.
According to the Bureau of Labor Statistics (BLS), rising unemployment claims can indicate a recession.
In 2020, unemployment claims rose sharply, signaling a potential recession.
Year Unemployment Claims Recession 1960 1.5 million No 1966 1.2 million No 1970 1.5 million No 1974 3.5 million Yes 1980 5.5 million Yes 1984 2.5 million No 1990 3.5 million Yes 2000 1.5 million No 2007 4.5 million Yes 2020 10.5 million Yes
Glossary
Inverted Yield Curve
An inverted yield curve is a recession indicator that occurs when the yield on short-term bonds is higher than the yield on long-term bonds.
PMI Below 50
PMI below 50 is a recession indicator that occurs when the Purchasing Managers Index (PMI) falls below 50.
Rising Unemployment Claims
Rising unemployment claims are a recession indicator that occurs when the number of unemployment claims increases.
Consumer Confidence Drops
Consumer confidence drops are a recession indicator that occurs when consumer confidence falls.
Housing Starts Decline
Housing starts decline are a recession indicator that occurs when the number of new housing starts falls.
Credit Spreads Widening
Credit spreads widening are a recession indicator that occurs when the difference between high-yield and low-yield bonds increases.
Leading Economic Index (LEI)
Leading economic index (LEI) is a recession indicator that occurs when the LEI falls.
Industrial Production
Industrial production is a recession indicator that occurs when industrial production falls.
FAQ
What are recession indicators?
Recession indicators are economic metrics that signal a potential recession.
How do I use recession indicators?
Investors can use recession indicators to make informed investment decisions and adjust their portfolio allocation.
What are the most common recession indicators?
The most common recession indicators include inverted yield curve, PMI below 50, rising unemployment claims, and more.
How do I interpret recession indicators?
Investors can interpret recession indicators by analyzing their historical data and trends.
Can I use recession indicators to predict recessions?
Recession indicators can signal potential recessions, but they are not a guarantee.
What are the benefits of using recession indicators?
Using recession indicators can help investors make informed investment decisions and adjust their portfolio allocation.
What are the limitations of recession indicators?
Recession indicators have limitations, including their ability to predict recessions and their historical accuracy.
How do I stay up-to-date with recession indicators?
Investors can stay up-to-date with recession indicators by following reputable sources and analyzing historical data.
External Links
- Federal Reserve Economic Data
- St. Louis Federal Reserve Economic Data
- Bureau of Labor Statistics
- United States Census Bureau