Every year when I meet with my financial adviser for the annual review of my investments he asks me how the job market is. He knows that recruiters often have the first insight into the start of a recession. Recruiters can feel when the hiring market starts to soften, when clients start to pull back from creating new jobs and interviewing more candidates. The New York Times published a great article by Ben Casselman on July 29, 2019 entitled, A Recession is Coming (Eventually). Where You’ll See It First. Here are their four main indicators and four minor indicators when trying to predict a recession.
Major Indicator: The Unemployment Rate
The NYT agrees with most recruiters that rapid increases in the unemployment rate, no matter how low the rate is to begin with, almost certainly can predict a recession on its way or one that has already arrived. “The unemployment rate pretty much always spikes in a recession, and it rarely rises much without one.” The good news is the unemployment rate now is trending down. Historically this means that there is a less than one in ten change of a recession within the next year.
Major Indicator: The Yield Curve
When interest rates on long term bonds fall below the rates on short term bonds, the yield curve is inverted. This means that investors are willing to accept lower rates, even when they tie up their money for longer time periods, for the safety bonds provide. We are currently in an inverted yield curve. Historically this means there will be a recession in the next two years. There is some argument that the interest rate increases by the Fed and the huge holdings of bonds the Fed accumulated during the last recession put downward pressure on long-term rates….and not a soon-to-be recession.
Major Indicator: ISM Manufacturing Index
Each month the Institute for Supply Management (ISM) surveys purchasing managers at major manufacturers about their companies’ orders, inventories, hiring and other activity and creates an index. Readings above 50 indicate the manufacturing sector is growing, below 50 it is contracting. When the index falls below 45 it almost always predicts a recession. Right now the index is still expanding but getting battered by a global slowdown and trade tensions.
Major Indicator: Consumer Sentiment
Measures of consumer confidence provide insight into how consumers will spend in the future. These indexes are volatile month to month as consumers react or overact to the stock market, political upheavals or natural disasters. Short term volatility doesn’t typically translate into real changes in spending but sustained declines of 15% year-over-year reliably predict a recession. Right now consumer confidence is flat compared with a year ago but it has fallen since late last year.
Minor Indicator: Temporary Staffing Levels
Hiring temporary staff when demand is high and laying them off as it dries up is a good measure of business sentiment. Right now temporary staffing is near a record high but it has stopped growing.
Minor Indicator: The Quits Rate
When workers are confident in the economy, they are more likely to quit voluntarily. This rate bottomed out shortly after the Great Recession ended and rose steadily until leveling off in the middle of last year.
Minor Indicator: Residential Building Permits
The housing market frequently leads the economy into and out of recessions. The more building permits the better indicator of the health of the economy. But construction has lagged since the last recession and housing makes up a smaller share of the economy than in the past, so permits may not be as meaningful an indicator of how to predict a recession.
Minor Indicator: Auto Sales
When new car sales are strong, it is a sign consumers are feeling good. Retail car sales typically peak before recessions then drop sharply once a recession begins. Currently auto sales are falling…not a good sign.