If I could devise a model that would accurately predict the onset of every recession or economic crisis, I’d probably be worth more than Warren Buffett, Bill Gates and Jeff Bezos combined.
But the truth is nobody can accurately forecast when a recession will hit, although there are some leading indicators investors and economists look out for when trying to predict economic activity the coming months.
While you may have heard chatter about the yield curve inverting recently, there are other indicators that are equally or more important. If you’re interested in tracking where the economy could be headed, keep your eyes on these numbers.
Keep in mind, however, that no single indicator can give you a complete picture of the economy’s health.
The key indicators
Employment figures provided by the Bureau of Labor Statistics provide a close-to-real-time snapshot of the economy. A decline in payrolls or hours worked — especially for more than a month or two in a row — can signal a slowdown in employment. An increase in unemployment claims is also troubling for similar reasons.
Keep in mind that there may be fluctuations isolated to some sectors of the economy, and that these don’t reflect as strongly on the overall picture of economic health. The unemployment rate stands at 3.7%, near historical lows, and is indicative of a robust employment market.
Housing prices, construction rates and supply are another set of indicators to watch. Generally speaking, when times are good, housing demand is high and prices rise. When demand begins to contract, fewer new homes get built, or existing homes sold. Both of these can indicate a slowdown is forthcoming. However, existing home prices and sales have each continued to increase in recent months.
The Consumer Confidence Index, which details consumer attitudes and buying intentions, is also important to monitor. (By some measures, the consumer makes up approximately 70% of the American economy.) Whether consumers feel confident about spending and the present or future trajectory of the economy tells us a great deal about where our fortunes are headed.
At present, this index continues to demonstrate persistently positive consumer attitudes regarding the economy.
You can also take a look at manufacturing numbers and business sentiment. The Institute of Supply Management’s famous ISM gauge is a measure of the overall health of the manufacturing industry via its PMI Index. It shouldn’t read below 50, as anything under that represents a contractionary environment.
Like consumer confidence, if business sentiment is low, it can also foretell a slowdown to come. The most recent PMI figures came in at 49.1, signaling a somewhat contractionary business sentiment and environment.
Gross Domestic Product (GDP) is the best measure of an overall economy’s health. Technically, we enter a recession when we have two consecutive quarters of negative GDP growth. (The first and second quarters of 2019 featured 3.1% and 2% GDP growth, respectively, both indicative of a continued, moderate expansion.)
Thus, a decline in the growth rate, while concerning, isn’t actually indicative of a recession. Still, slowing GDP numbers mean we could slip into a negative growth situation, and eventually, a recession, so GDP is still the gold standard by which recessions are truly measured.
Finally, the Conference Board’s Leading Economic Index provides a more comprehensive view of the economy, via a composite score derived from a variety of economic indices. It’s a handy gauge of where most major indicators are pointing.
The most recent reading signaled expectation for moderate growth in the second half of 2019. While no single gauge can provide a complete impression of the economic outlook, the LEI is often used as shorthand for economic expectations.