The bad news about the next recession: most economists won't predict it. The worse news: the few forecasters who will accurately predict the next recession will also be predicting recession for years of prosperity. Even though forecasts are not perfect, there are some warning signs that business leaders can use to assess the risk of a recession in the coming year.
Economists (including myself) did not predict the 2008-09 recession, nor the recessions of 2001, 1990, or 1982. However, we did anticipate the 1980 recession - which we thought would be mild. Oops.
There are some perma-bears who are always predicting doom and gloom. If a company follows their advice, the business will miss out on the good years by hunkering down too soon. Remember Pharaoh's dream: the fat years must be used to prepare for the lean years.
Here are the indicators that will be most useful for looking at the risk of a recession. Several of these indicators can be accessed via the FRED database, a great free service of the Federal Reserve Bank of St. Louis.
Interest rate spread between 10-year Treasury bonds and Federal Funds rate, 1950-2018
Dr. Bill Conerly, based on data from the Federal Reserve
Yield curve: The yield curve is a chart that compares long-term interest rates and short-term interest rates. For simplicity, we can look at the difference between the interest rate on the 10-year Treasury bond and the Federal Funds rate, which is an overnight maturity. Negative values, meaning short-term interest rates are higher than long-term rates, are red flags for recession, though not totally reliable. If you access the data from the FRED database, they do the arithmetic for you. (Data source: Federal Reserve. Available in FRED with series name T10YFF.)
Consumer expectations from the University of Michigan Survey of Consumers, 1950-2018
Dr. Bill Conerly, based on data from the University of Michigan
Consumer expectations: The University of Michigan's Survey of Consumers asks a number of questions about the current economic situation and expectations for the future. The overall consumer sentiment has proved to be useful (but not perfect), with the expectations subcomponent being a little better. (Data source: University of Michigan Survey of Consumers. The overall index is available in FRED with series name UMCSENT, but not the expectations component.)
Initial claims for unemployment insurance 1967-2018
Dr. Bill Conerly based on data from U.S. Department of Labor
Unemployment claims: Initial claims for unemployment insurance tend to be a leading indicator, perhaps by assessing the number of people who need to cut back on current spending. (Data source: U.S. Department of Labor. Available in FRED with series name ICSA.)
Slow deliveries from suppliers, ISM survey, 1950-2018
Dr. Bill Conerly based on data from ISM
Supplier deliveries: When purchasing managers report that their vendors cannot supply materials promptly, that's a sign of a strong economy. The opposite is also true: fast delivery times happen when the economy is softening. Data come from the monthly survey of members by the Institute for Supply Management. Unfortunately, they charge a hefty fee for historical data, though the website includes charts of recent data. (Data source: Institute for Supply Management Report on Business. Not available in FRED.)
Residential building permits, 1960-2018
Dr. Bill Conerly based on data from U.S. Census Bureau
Building permits: Housing construction is sensitive to interest rates, and Federal Reserve tightening is a common trigger of recessions. Thus, it pays to watch permits for new construction. This measure won't warn about every recession; it hardly blinked before the 2001 recession. (Data Source, U.S. Census Bureau. Available in FRED with series name PERMIT.)
In addition to my preferred indicators, shown above, the traditional Index of Leading Indicators, created by the Department of Commerce and now published by the Conference Board, includes average weekly hours in manufacturing, manufacturers' new orders for consumer goods and materials, ISM index of new orders, manufacturers' new orders for nondefense capital goods excluding aircraft, the S&P 500 stock market index, and the Conference Board's Leading Credit Index. I consider these indicators useful, but less so than the list above.
Some of the most-reported economic indicators are not "leading indicators," in that they do not lead the overall economy. Notably, unemployment tends to be a lagging indicator: it tells us where we have been, not where we are going.
There is no simple method that reliably forecasts recessions without false alarms. However, these leading indicators bear watching. When two or more of them flash warning signs, it's time to review a company's recession contingency plans.