6 Signs We’re Heading Into a Recession

recession market scare crash downturn stock business men
By Andrey Burmakin / Shutterstock.com

Are we now at a turning point — the start of a bear market and economic recession?

The financial markets have experienced dizzying volatility through autumn, erasing the market’s gains for 2018. And now, a new poll shows that nearly half of 212 corporate chief financial officers predict that the U.S. economy will fall into recession in 2019.

While it’s also true that half of the CFOs do not expect a 2019 downturn, 82 percent of them agree that, if the current boom survives 2019, a downturn will hit by late 2020, says Duke University’s Fuqua School of Business, which surveys the CFOs regularly. The financial officers also have a pessimistic outlook for the economies of Canada, Europe and Asia.

But you can draw your own conclusions. The stock market responds to — and signals — changes in the economy. To get a better sense of what’s coming, analysts look at the following important indicators, and you should too.

1. Yield curve inverts

Upside down woman
Leila-Ablyazova / Shutterstock.com

Typically, long-term bonds pay more than short-term bonds. This makes sense: If you agree to tie up your money for longer periods of time, you should be paid more for your trouble. This is why a five-year CD pays more than a one-year CD.

Rarely, however, the reverse is true: Long-term bonds start paying less than short-term bonds. When that happens, a recession often follows. In fact, this situation, known as an inverted or negative yield curve, has proven a highly accurate recession predictor.

Why would long-term bonds ever pay less than short-term bonds? Well, the Federal Reserve controls short-term rates, but the market controls the rates on longer term securities. The Fed can raise short-term rates, which is exactly what they’ve been doing for the past couple of years. But if investors start thinking things don’t look so good in the economy, they keep their powder dry by buying long-term bonds. The more they buy and bid up the price, the lower the rates on these securities go.

As I write this, the yield on 2-year Treasury bonds is 2.75 percent, and the yield on 10-year T bills is 2.91 percent, so the long-term rate is still a bit higher than the shorter-term rate, but the gap has been narrowing. If the yields converge or the 2-year bond yields surpass those on 10-year bonds, that could signal a recession is coming soon.

What to watch: See Treasury yields at the U.S. Treasury.

2. Leading economic index slips

By AlexLMX / Shutterstock.com

The Conference Board’s Leading Economic Index is one predictor of global economic health. Monthly dips in this measurement aren’t alarming. However, Mark Tepper, CEO of Strategic Wealth Partners, told CNBC viewers in August to watch for a trend of year-over-year drops in the benchmark. According to CNBC, he said:

When it contracts, a recession usually follows.

The latest report shows the index still growing at 5 percent year over year, so there’s no reason for concern right now.

What to watch: Keep an eye on Conference Board press releases or media coverage of the index.

3. Interest rates rise

By Becky Stares / Shutterstock.com

Government monetary policy can be another economic bellwether. We’ll explain what to watch, but first, a quick refresher on how it works:
The Federal Reserve influences the economy by using a couple of tools. One of those tools is control over short-term interest rates. If the economy is in the doldrums, it can lower rates to encourage consumers and businesses to borrow, buy and invest, which stimulates the economy. That’s why interest rates were kept near zero following the Great Recession that began in December 2007.

On the other hand, if the economy is growing too fast, that can lead to rising prices, otherwise known as inflation. To cool things down, the Fed raises rates, which serves to put the brakes on the economy by discouraging both consumers and businesses from borrowing and spending as much.

While interest rates don’t directly affect the stock market, when businesses have to pay more in interest, that hurts their profits, which will ultimately be reflected in a lower stock price. Also, as rates rise, investors sell stocks, driving prices lower. Why do they sell? Think about it: If you can earn high interest from guaranteed bank accounts or Treasury bonds, why take a chance on stocks?

The Federal Reserve has been pushing interest rates higher in small increments for the past two years to keep inflation in check. Most analysts expect another increase during the Fed’s last 2018 meeting, on Dec. 18-19.

Fed moves, along with the yield curve and Leading Economic Index — the three most important indicators –suggest that there’s still time before a bear market sets in, according to the CNBC report in August. CNBC said:

The three biggest recession indicators are not showing warning signs just yet, so continue to ride the bull market for at least a year.

Money Talks News founder Stacy Johnson agrees.

What to watch: Press coverage of the Federal Reserve Board of Governors’ regularly scheduled meetings.

4. Consumer sentiment falls

By WAYHOME studio / Shutterstock.com

Another economic indicator published by the Conference Board, the Consumer Confidence Survey, samples Americans’ “attitudes and buying intentions.”

In November, the survey’s index fell to 135.7, down from October’s 137.9. Still, Consumer Confidence is at “historically strong levels,” according to The Conference Board. So, no worries yet on this front. A trend of falling confidence would be a sign that consumers are growing more nervous about the economy.

What to watch: Track press releases for the monthly report at the Consumer Confidence Survey. The survey is also widely covered in the media.

5. Business confidence cools

By tomertu / Shutterstock.com

Look for signs of trouble in faltering business confidence, says CME Group, a Chicago-based marketplace for derivatives.

Among the risks to business confidence are the ongoing trade war — kicked off by the United States with the imposition of import taxes, or tariffs, intended to give American businesses a bulwark against foreign competition, especially Chinese companies. But the practice tends to spark retaliation — as it has from China, which imposed tariffs on a key American exports — and take a toll on the larger economy.

The current trade war initiated by the U.S. raises the risk of a global recession, CME says, in a discussion of recession warning signs:

First, the trade war disrupts business planning and potentially raises costs related to supply chain management, and in so doing, decreases corporate profits overall (although a few specific companies will benefit). Second, the trade war hurts the Chinese economy and exacerbates the slowdown in growth.

What to watch: Check surveys of business confidence, like the National Federation of Independent Business’ Small Business Optimism Index (down slightly in November but continuing an “exceptionally strong two-year trend.”) Also, Moody’s publishes several economic indicators, national and global.

6. Vanguard’s risk forecast worsens

Storm Ahead sign against stormy sky
Sergey Niven / Shutterstock.com

Vanguard, a massive asset management firm, runs numbers constantly to get a handle on the risk of a recession.

Before the recession that started in late 2007, Vanguard’s six-month forecast had said the probability of a recession in six months was greater than 40 percent, according to The New York Times.

In late summer this year, Vanguard estimated the chances of a recession happening by late 2020 at between 30 and 40 percent, the company’s “highest-ever estimate for that time frame,” the Times reports. That’s a general indicator, not a prediction, Vanguard’s chief investment officer told the newspaper. In fact:

“You could also say the chance of a recession not occurring by the end of 2020 are 60 to 70 percent,” said Fran Kinniry, a principal in Vanguard’s investment strategy group.

In recent years, Vanguard’s six-month risk forecast had been running at about 10 percent.

Are you concerned about your investments or taking measures to deal with risk? Share with us in comments below or on our Facebook page.

Marilyn Lewis and Stacy Johnson contributed to this post.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
25 Things You Should Never Buy — and What to Buy Instead
25 Things You Should Never Buy — and What to Buy Instead

If you really want to save money, become a more intentional shopper.

3 Ways a Health Savings Account Can Improve Your Finances
3 Ways a Health Savings Account Can Improve Your Finances

Open an HSA in minutes to help you save on taxes, cover medical expenses and grow your retirement nest egg.

9 Things You Should Never Pay For With a Debit Card
9 Things You Should Never Pay For With a Debit Card

Use your debit card for one of these expenses, and you could risk your bank account balance, your credit score or even identity fraud.

9 Indestructible Products That Are Worth the Price
9 Indestructible Products That Are Worth the Price

If you’re willing to pay a little more for these products, you may never have to shop for another again.

12 Expenses You May Be Tempted to Claim as Tax Deductions — but Shouldn’t
12 Expenses You May Be Tempted to Claim as Tax Deductions — but Shouldn’t

Thinking of trying to deduct a few of these things on your federal tax return? That could be a costly mistake.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making
10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

7 Social Security Rules Everyone Should Know by Now
7 Social Security Rules Everyone Should Know by Now

Confusion over Social Security is a shame, considering how many of us will need this money badly.

9 Shopping Mistakes to Avoid at Costco
9 Shopping Mistakes to Avoid at Costco

Are you missing out on serious savings at your favorite warehouse club?

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

They don’t make coffee makers like this anymore.

The 16 Cars Most Likely to Last 200,000 Miles
The 16 Cars Most Likely to Last 200,000 Miles

One automaker takes half the spots on a list of the longest-lasting vehicles.

14 Things You Should Stop Buying in 2021
14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

Is Writing a Check Still Safe?
Is Writing a Check Still Safe?

Every time you pay by check, you hand your bank account numbers to a stranger.

6 Ways to Protect Your Retirement Accounts From Hackers
6 Ways to Protect Your Retirement Accounts From Hackers

Imagine having $245,000 stolen from your retirement account — and not being reimbursed.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

This Is the Most Dependable Car Brand in the U.S.
This Is the Most Dependable Car Brand in the U.S.

This brand’s vehicles are least likely to give drivers repair headaches, according to J.D. Power.

9 Deep Discounts Available on Amazon This Friday
9 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

7 Hidden Sections of Amazon Every Shopper Should Know
7 Hidden Sections of Amazon Every Shopper Should Know

These little-known departments of Amazon are gold mines for deal-seekers and impulse shoppers alike.

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.