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.
[ 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."
Indicator 1: Unemployment
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.
Indicator 2: Yield Curve
What to look for: The yields on 10-year government bonds that fall below them on three-month bonds. (It has already happened.)
What it says: Storm alert.
Discussion: The yield curve is less intuitive than unemployment, but it has historically been among the best predictors of the recession.
The basics are simple: the curve mainly shows the difference between the interest rates on short-term and long-term government bonds. When long-term rates fall below short-term rates, the yield curve is said to have "inverted."
Think of the yield curve as a measure of how secure investors are in the economy. In normal times, they require higher interest rates in return to tie up the money for longer periods. When they get nervous, they are willing to accept lower prices in return for the unsurpassed security bonds offered. (It's the simplified version. My colleague Matt Phillips gave a more detailed explanation last year.]
The Federal Reserve Bank of New York has developed a practical calculation that translates fluctuations in the yield curve into recession. it gives the chance of a recession that starts next year at about one in three – up sharply from a year ago, and not far from where it was on the trip to the Great Recession.
Don't panic though. claims that the yield curve means less than it used to do, partly because the Fed until recently raised short-term interest rates, even though the huge portfolio of bonds it accumulated during the recession puts pressure on long-term interest rates, and together, these actions can take the form of the yield curve. in any case, it has taken as long as two years for a recession to follow an inversion of the yield curve in the past.
Rel indicators: The Financial Conditions Index (from the Chicago Fed); stock market.
Indicator 3: ISM Manufacturing Index
What to look for: The index fell below about 45 for an extended period of time.
What it says: Mostly cloudy.
Discussion: Each month, the Institute for Supply Management surveys purchasing managers at major manufacturers about companies' orders, inventories, hiring and other activity. It then aggregates the responses into a index: Readings over 50 indicate that the industry is growing; under 50, it is contracting. (The institute also releases a measure of activity in the service sector, but that index does not go too far.)
The production index has some important advantages. It is released early, often on the first day of the following month, and unlike many financial data, it is not audited. Most importantly, the index is a true leading indicator: it has historically shown signs of trouble before the broader economy hit the limbs.
On the other hand, the industry no longer operates the US economy, which means a contraction in the sector cannot guarantee a recession. The ISM index fell below 50 for several months in 2015 and 2016, for example, signaling an "industrial recession" that never became the real thing. But steep downturns in the industry tend to be signs of problems – it is rare for the index to fall well below 45 or so without a recession hit.
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.
Indicator 4: Consumer Sentiment
What to look for: Decrease of 15 percent or more over a year.
What it says: Partly cloudy.
Discussion: Consumers are running the economy, now more than ever. It's pretty much impossible for the economy to continue to grow if Americans decide to keep their wallets closed.
The problem is that as the decline slows, it is probably already in a recession. Measures for consumer confidence, such as the longstanding indexes from the Conference Board and the University of Michigan, provide insight into how consumers will use the future.
The confidence indices are unstable from month to month, and they sometimes decline sharply as consumers react (and overreact) to the stock market, political development and other events. These declines often do not entail real changes in spending.
But persistent decline is another matter. Economists at Morgan Stanley recently found that a fall of 15 percent year over year in the Conference Board's index is a reliable predictor of a recession.
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.
Indicator 5: Choose your favorite
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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Temporary staffing level: Temporary workers are, by definition, flexible – companies hire them when they need help quickly and get rid of them when demand dries up. This makes them a good measure of business atmosphere. As of June, the substitute is near record high, but it has pretty much stopped growing.
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Termination Rate: When workers are confident in the economy, they are more likely to quit voluntarily. The graduation rate, a favorite indicator of Janet Yellen the former Fed chair, settled to the bottom shortly after the Great Recession ended and rose steadily until it settled in the middle of last year.
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Housing construction permits: The housing market has often brought the economy in and out of recessions. Which has made building permits – which are usually issued several weeks before construction begins – one of the best historical indicators of economic activity. But construction has hung after the recent recession, and housing accounts for a smaller proportion of the economy than before, so permits may not be as meaningful now.
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Car sales: After houses, cars are the most expensive thing most families buy. And although owning a car is effectively necessary in large parts of the country, buying a new one is almost never. So when new car sales are strong, it's a sign that customers are feeling good. Retail car sales have typically peaked before the recession, and then fell sharply as they began. So that's not a great sign that sales are falling.
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