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Is A U.S. Recession Looming? Here Are The Key Indicators To Watch

Jul. 30, 2019 4:06 PM ET15 Comments
Brian Sterz, CFA profile picture
Brian Sterz, CFA


  • While recessions are notably difficult to predict, there are several key indicators that are particularly relevant for assessing the forecast.
  • Although correctly identifying a coming recession can help investors preserve their wealth, over-reacting to a false-positive recession forecast can do the opposite.
  • Investors should keep an eye on key indicators, particularly since numerous warning flags are waving—and be mindful of the potential portfolio effects.

Find a parade and there’s a good chance you’ll also find someone waiting to rain on it. This metaphor can be applied to many things, and the economy is no exception. When it’s chugging along nicely, people love hand-wringing about when things will reverse course, yet things have been persistently bright as of late. The U.S. economy is now in its longest expansion ever—a stunning 120 months—despite predictions of a recession since 2011.

Still, most parades come to an end eventually, and it’s wise to be diligent about the economic forecast, particularly since recessions—defined specifically as two consecutive quarters of a decline in real GDP and a drop in aggregate demand—correlate so strongly with bear markets.

Some common causes of recessions are geopolitical events like trade wars and oil embargoes; asset bubbles or financial crises; and the tightening of monetary policy—usually in response to inflationary overheating. If you’re tuned in to the macroeconomy, some of those probably sound familiar.

The reality is that the U.S. and global economies are slowing, trade war actions are increasing and interest rates do appear to be decreasing. While recessions are notably difficult to predict (as the aforementioned eight years of false calls for one suggests), several indicators are particularly relevant for assessing the forecast. Let’s look at each one—and what the rain clouds in the distance are telling us.

First is the yield curve, which refers to the difference in interest rates between short-term and long-term treasuries. It’s unusual for short-term rates to be higher than long term rates—something called an “inverted curve”—and usually signals that economic growth and inflation will decline over the intermediate term.

Shape Of Current Yield Curve Inversion vs. Previous InversionsThe spread between the three-month and 10-year treasury rate has inverted prior to every recession since 1945 (though to be fair, the curve did invert many times in the 1980’s, 1990’s

This article was written by

Brian Sterz, CFA profile picture
Brian began in the investment management industry in 2001 and has extensive experience advising institutional and high-net worth clients. As portfolio manager at Miracle Mile Advisors, Brian works with entrepreneurs experiencing liquidity events, corporate professionals and families undergoing generational transfers of wealth. He also serves on the firm’s investment committee. Prior to joining Miracle Mile Advisors, Brian founded and ran Clarity Investment Advisors, a Los Angeles based investment advisory firm. Before starting his own firm, Brian spent 7 years at EP Wealth Advisors as a member of the firm’s investment committee and investment advisor where he focused on fixed income and equity research and security selection, and led due diligence on alternative investments and overall asset allocation decisions for the firm. Brian earned his B.A. from UC Berkeley, and his MBA from UCLA Anderson School of Management. He holds the professional designation of Chartered Financial Analyst (CFA®) and remains active in the CFA® Society of LA as a panel speaker and mentor. He also holds an active life insurance license in California (CA #0L33996). Brian is actively involved with community organizations such as Back On My Feet of Los Angeles and Team-In-Training.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (15)

“... more than 50% of S&P 500 revenues come from abroad...” Interesting given, I believe, only some 20% of total US trade is overseas. This suggests that domestically focused US equities could do better; but they could be affected by a general malaise.
David Haggith profile picture
Did anyone notice that the unemployment curve looks almost flat at the bottom now, and that there is typically only a few months between the first uptick at the bottom and the start of a recession? Did anyone notice that high-yield spreads have not trough and turned back upward for longer than they did before the start of the Great Recession? PMI sits flat and is on a strong downward trend. Consumer confidence is a TRAILING indicator for the economy. Consumers don't respond with lack of confidence until they plainly see the economy (especially employment) is getting weaker. And most of the rest of the world is fully in a manufacturing recession. The US has trade sanctions on Russian and Iran, tariffs on Europe, Mexico, Canada, and China. There is very little hope of the China turning a quick deal with Trump, even though investors keep stupidly thinking there is just because they want it that way. And because of those tariffs, it costs you $40 now for a bottle of tequila that used to relax your day for $25! And the House has made no move toward accepting Trump's new NAFTA 2.0. So, dream on if you are one who liked to make investing plans based on best-case scenarios.
Ben Gee profile picture
A prolong trade war will bring a recession on.
Yes, but....

1. The 10-year Treasury is in a bubble because Europe has negative interest rates. Normally, rates invert when the short-term rates soar.

2. The Chinese economy is measured by the Chinese government statisticians. The reported results do not necessarily correspond to reality for a number of well-known reasons.
Ben Gee profile picture
Chinese reality is NOT the same as western reality. The fact is poor countries do not have the same reality as rich ones.
Shaduc profile picture
China is closer to developed economy than not, it is considered an upper-middle economy based on per capita GDP, around same as Russia & Malaysia.
David Haggith profile picture
And the Fed is about to make #1 a fait accompli.
Unemployment rate is largely manipulated (faked) number - no one can verify it plus interestingly many employed are not accounted for resulting in even more inaccurate whatever they print a number.

Secondly high yield bond is again not accurately represented. Many many triple BBB just above investment grade bonds in S&P should be considered junk status.....those BS America credit ratings company make them investment grade so that all institutions can hold and buy these corporate bond. If they are junk, I’m sure the spread and risk are well higher.
Bart_Simpson profile picture
@Brian Sterz, CFA Thank you - this is an insightful article
InvestingIdeas profile picture
Well, in order for a recession we need negative GDP. With employment maxed out and interest rates lowering (more available money for people/companies to burrow). It seems unlikely that GDP will turn negative, unless some unseen catalyst occurs. (eg. significant global trade restrictions or some kind of war)
David Haggith profile picture
First, remember that GDP is more often revised lower (as we just saw) in subsequent prints than it is revised higher. So, the current print of 2.1% is likely to come down. Second, note that the last time we went into recession, GDP dropped further in one quarter than what we need to drop right now to get into recession. Third, note that there is almost nothing in the pipeline now that the peak benefit of tax reduction (which was front loaded to get the most bang for the buck as quickly as possible) has played through and trade is worsening. Fourth, note that almost all of that tax benefit went to stock-holders' pockets; almost none went to business development and expansion and very little went to the average consumer whose only stock investments are locked away in retirement plans that won't do anything to help the economy right now, and now tariffs have fully taken back what little did go to the consumer who is the primary target of tariffs. That's the reality of the present situation. So, what exactly is going to keep GDP from dropping more in the present quarter -- lower interest on credit lines that are already maxed out for most people? No sense putting lipstick on a pig.
About 100,000 years ago the ancestors of homo sapiens learned how to distinguish between rustling of the grass in the African savanna that was caused by the wind and rustling that was caused by a hungry lion.

Fortunately, enough of them learned how to make this distinction to lead to us. The current global economy is far more difficult to understand than the African savanna. Maybe we will evolve, as a species, to figure this out. But for the moment, we are all lost and just guessing about the meaning of the rustlings we hear about.

The only rational response seems to me to be a rather large and highly diversified portfolio, more or less equally weighted, so that the loss of any two or three securities will not doom it. But that's just me, Capt. Chicken.
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