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Home / Business / A recession is coming (gradually). Here's where you want to see it first.

A recession is coming (gradually). Here's where you want to see it first.



Last week's report on gross domestic product in the second quarter showed that the economy slowed down last spring . It also came exactly 10 years since the Great Recession ended, making this officially the longest expansion in American history. (Well, probably. More on that in a second.) So it is perhaps no surprise that forecasters, investors and ordinary people are increasingly asking when the next downturn will come.

Economists often say that "expansions do not die of old age." That is, recessions are like coin buttons – just because you get heads five times in a row doesn't mean it's more likely that the next flip comes up tails.

Still a new recession will come in. Fortunately, economic expansion, unlike the coin flip, usually gives some hints as they near the end – if you know where to look. some of the indicators that have historically done the best job of alerting.

[ The Federal Reserve is ready for lower interest rates for the first time since the Great Recession. ]

One caveat: Economists are notoriously terrible at predicting recessions, especially more than a few months in advance. It is actually possible (although unlikely) that a recession has already begun, and we just don't know it yet.

"Historically is it pray What forecasts have managed to do consistently is to acknowledge that we are in a recession when we are in one, ”said Tara Sinclair an economist at George Washington University. "The dream of an early warning system is still a dream we are working on."

What to look for: Rapidly increasing, even from a low level. [19659002] What it says: All clear.

Discussion: Unemployment is close to 50 years low, but that does not mean anything to the recession. What matters is the change: When unemployment rises rapidly, a recession is almost certainly on its way or has already arrived.

Even small increases are significant. Claudia Sahm an economist at the Federal Reserve, recently developed a rule of thumb that compares current unemployment with its low point over the last 12 months. (Both are measured using a three-month average to smooth out short-term blips.) When this gap hits 0.3 percentage points, the risk of a recession increases. At half a percentage point, the decline has probably already begun.

Unemployment is considered a "limiting" indicator and is unlikely to be the first place to address signs of problems. But what it lacks in timeliness, it compensates for its reliability: Unemployment is almost always in a recession, and it rarely rises much without one.

Therefore, unemployment is now a source of comfort: Not only is it low, it is trending down. When that has historically been the case, there has been less than one in 10 chance of a recession over a year, according to a Brookings Institutional analysis conducted by Ms. Sahm's measures.

Related Indicators: Initial unemployment insurance claims; growth in payroll.

Right now, American manufacturers are facing a global downturn and trade tensions. As of June, the index is still in the expansion range, but hardly. Many economists believe it will fall below 50 in the coming months, but do not expect a steeper decline.

Related Indicators: New orders for capital goods; regional production surveys from Federal Reserve banks; the hiring and compensation components of the National Federation of Independent Business's monthly survey.

With this calculation, the economy is not in trouble. Consumer confidence is basically flat compared to a year ago, but it has fallen since late last year.

Related Indicators: Retail Sales; average hourly wage; real personal income.

O.K., this is cheating. But no indicator can tell the whole story of the US $ 20 trillion, and measures that have worked well in the past may not do so in the future. So it pays to keep track of a variety of data sources.

The above indicators are among the most common inputs to the formal models that economists use to predict recessions. But many economists have a favorite indicator (or maybe a couple) that they also look at as a gut check.


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