Is a Recession Coming? Where Will You See it First?

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Many economists believe a recession is coming, eventually. Part of their reason for believing this is due to the ten straight years of economic expansion in America, which may be the longest period of expansion in history.

While another recession may come, it will likely not be like it was in 2008 or any other past “Great Recessions” were. It’s also likely we will see some of the indicators and signs it’s coming before it hits. Let’s look at some of the places a recession may hit first.

Before we get into the indicators of a recession, it’s important to note, economists have always been rather terrible at forecasting recessions. Typically, the best they can do is identify a recession once we are actually in one.

The Unemployment Rate

When looking at how the unemployment rate shows signs of a recession, it’s not about the overall number. It’s about rapid changes, specifically when the unemployment rate rises very quickly. This is usually a clear indicator that a recession is on the way or has already begun.

Currently, the unemployment rate is historically low and it’s trending down. This is a good thing and means a recession is very unlikely.

The Yield Curve

While the yield curve isn’t as intuitive as the unemployment rate when it comes to a recession, it has been used to predict recessions in the past. When interest rates on 10-year Treasury bonds fall below the rates on three-month bonds, it can be an indicator of a recession looming. This has already happened in today’s economy.

Basically, the yield curve shows how confident investors are in the current economy. While it could be easy to look at the yield curve and panic, many economists say it’s not as trustworthy as a sign of a recession as it used to be.

The ISM Manufacturing Index

When the ISM Manufacturing Index falls below 45 for an extended period of time, it can be a sign of a recession. This index shows whether the manufacturing sector is growing or declining. The index compiles data collected from the purchasing managers from major manufacturers. Readings above 50 show the sector is growing.

Many believe the ISM Manufacturing Index is a leading indicator because it’s released on the first of the month and doesn’t get revised, like some of the other indicators. It’s also proven to show signs of trouble before a recession or economic downturn.

However, manufacturing doesn’t drive the American economy like it once did, making it less trustworthy today than it was in the past. In fact, in 2015, the index dipped below 50 for several months, which should signal an industrial recession, but that never really happened.

A few other economic indicators of a recession include:

  • Consumer Sentiment declining by 15% or more
  • Temporary Staffing Levels dropping quickly
  • How willing workers are to quit when they are not in a favorable working situation, known as The Quit Rate
  • Residential Building Permits – The housing market is certainly an indicator and plenty of homes for sale in Mint Hill, NC and other areas of the county, along with new construction permits, is a sign of a good housing market.
  • Auto Sales dropping quickly may also be an indicator of a recession
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