Economics is a numbers-based field: How stock markets are faring, measures of economic productivity, that sort of thing. In that sense, it’s unusual that detecting one of the most important economic shifts, from growth to a recession, is more art than science.
In recent days, concern about a looming recession has increased, in part due to negative economic data from Europe. On Wednesday, markets dropped substantially and remained tentative early Thursday morning. But while the effects of a recession are immediate — increased layoffs, lower productivity — the official determination of a recession happens only after the fact by the National Bureau of Economic Research, a nonprofit research organization located far from Wall Street and Washington in Cambridge, Mass.
We were curious, then, what average Americans should be keeping an eye on to track whether a recession was imminent or had already begun. So we asked people who do this for a living: Journalists, academics and a former treasury secretary. Their answers are below — as are their answers to the related question of why the economy suddenly looks so wobbly.
Before diving into their responses (which have been lightly edited), it’s useful to define some terms of art that may not be familiar to average readers.
The Fed. The Federal Reserve Bank. The Fed manages the American banking system, setting loan interest rate targets aimed at keeping the economy from growing too quickly or too slowly.
Housing starts. A colloquial term for the number of new privately-owned housing units permitted or constructed. In other words, how many houses are being built.
Jobless claims. The number of people filing for unemployment in a given week.
Non-farm payrolls or employment. This is the monthly employment number that’s reported alongside the unemployment rate. (The two are measured using separate surveys, so they don’t always move in the same direction.) It excludes farmworkers and is generally adjusted for seasonal shifts, such as retail hiring for the holidays.
Senior loan officer survey. A quarterly survey conducted by the Fed tracking business at domestic and foreign banks.
Troughs. The low point of a recession. As opposed to a peak, the high point of an economic expansion. Recessions occur between peaks and troughs.
Yield curve inversion. The Post went into this in-depth on Wednesday. In short, it’s a measure of how interest rates on short-term bonds compare to long-term bonds. Interest rates go down as interest goes up. An inversion occurs when interest rates on short-term bonds are higher than long-term bonds, meaning that investors see longer-term investments more favorably than short-term ones.
What are you tracking to see if a recession is coming?
Most common responses: Yield curve, jobs data, consumer data, the clock.
Carl Quintanilla, CNBC anchor
Obviously, folks are focused on the yield curve inversion — because no recession has been without one in the past 45 years. But because of the long historical lead time from inversion to recession (anywhere from three months to as long as 22 months), we’ll watch a few other metrics:
- Challenger layoff survey. It’s up 35 percent year-to-date from 2018, largely due to autos. If it builds, you’ll hear people mention it more.
- Harder employment data. Either a spike in jobless claims or an increase in the overall unemployment rate. Many economists say red zone would be a jump of 0.3 percentage points.
- Finally, if you see the three month average of non-farm employment gains fall below, say, 100k, look out for more recession calls.
One last thing: the spread between Conference Board consumer confidence current and future expectations. It’s at its widest since 2001 — and bond fund managers like Jeff Gundlach say it’s one of their favorite indicators.
Laura Veldkamp, professor of finance at Columbia University’s Graduate School of Business
Right now, the yield curve is inverted, meaning that the market thinks future interest rates will be lower than they are today. The Standard & Poor’s 500-stock index surged in the last three years, but has recently fallen off a little. These are useful indicators because they reveal what a large group of people think and recessions are partially a mass psychology phenomenon. If we all think there will be a recession, everyone produces a bit less in anticipation of lower demand. Lower production is the recession.
At the same time, sometimes there is some market blip that is not grounded in any real economic change. That's why I like to look at some direct measure of economic activity as well.
The favorite real economic indicators are all a bit problematic lately.
- Exports used to be a good measure of activity. They are measured frequently and accurately. But recent trade wars create drops in exports that might not reflect fading health of companies.
- Housing starts have been a very reliable indicator in the past. But big changes in the housing market and the way in which houses are financed make today’s housing numbers an imperfect comparison to the past.
- Industrial production is another monthly measure that is pretty well measured. Of course, industrial production is becoming a smaller and smaller part of our economy.
All three of these real economic indicators are flat or falling.
Ioana Marinescu, assistant professor of economics, University of Pennsylvania
The time since the last recession! This is because we can't predict much, so this is an average summary of "stuff" that we don't fully understand.
We know there are business cycles and the average distance between troughs. This gives an idea of when the next recession will strike.
Based on NBER numbers, the average trough to trough direction is 70 months, or about six years. Given this number, I expect a recession any day now, because it’s been almost 12 years since the last trough. However, it’s impossible to predict with high accuracy when it will happen since recessions are often precipitated by market panics coalescing around a particular event that is usually hard to anticipate.
Joe Weisenthal, executive editor of news for Bloomberg Digital
In terms of indicators to keep an eye on, there are a few basic things I’ll be keeping an eye on by obsessively watching my Bloomberg terminal.
Indicators regarding the health of the U.S. consumer, such as personal spending data and retail sales numbers, will be important to watch. Much of this expansion can be attributed to the health of the consumer, so if there are any signs that trade headlines or market volatility are feeding into consumer weakness, that’s something to watch.
Relatedly, any labor market data is important to keep an eye on. I like watching the initial jobless claims number that comes out every Thursday morning, since that’s a high-frequency datapoint that can indicate whether companies are starting to lay off workers. And of course my favorite thing in the world to watch is the monthly non-farm payrolls report, which I will obsessively pay attention to and tweet about for the rest of my life.
Most of these data points come out at 8:30 a.m. on various days, so you’ll find me glued to my terminal around then, waiting for the number to pop up.
Catherine Rampell, Washington Post opinion columnist
An inverted yield curve is of course often one leading indicator. Others include durable-goods orders, the senior loan officer survey, building permits, the Conference Board’s leading economic index, etc. — reports that are not exactly household names but tend to be more forward-looking.
The NBER Business Cycle Dating Committee is the official arbiter of recession/expansion dates. So if you’re trying to assess whether a recession is really, truly happening you have to guess what the committee members are thinking. They use a gestalt-ish broad array of economic indicators (so not e.g. just the two-consecutive-quarters-of-GDP-decline definition) and generally don’t officially crown a new business cycle turn until a while after it has already passed.
Why might a recession be looming?
Most common responses: Trade wars, the self-fulfilling prophecy of concerns about the economy.
Lawrence Summers, former treasury secretary
If the economy goes into recession, trade war uncertainty and global economic weakness will be the proximate cause. The ultimate cause will secular stagnation forces that have caused the economy to require the fiscal and monetary accelerators be pushed to the floor just to achieve adequate growth.
In the past, people talked about the economy “overheating,” so higher wages would mean increased prices, which ends up stalling the expansion. I don’t think it’s the case this time around, as wage growth has been incredibly subdued during the current expansion. I am especially noticing this because I am a labor economist and have been working recently on wage suppression.
So, with overheating not being a strong concern, if I had to take a wild guess about why a recession may start, I would cite growing policy uncertainty, with areas of uncertainty around trade being probably quite significant. If you look at the global index of uncertainty, it’s essentially at an all time high. Again, we can’t predict a recession based on that, but I am just taking an educated guess based on the data.
If we do get a recession, it’s likely to be as a result of political and institutional inertia. So for example, there’s a widespread belief that many of the world’s economic imbalances are as a result of overly tight fiscal policy in Europe (particularly in Germany). More spending out of Europe is an obvious solution, but that runs into the problem of euro-area rules on spending, as well as German domestic politics.
In the United States, the Fed could probably get more aggressive, but there’s an inclination to be cautious and to wait until the data confirms the weakness. That of course runs the risk of waiting too long.
The other thing to think about are financial markets themselves. We like to think about the stock market as being a reflection of the real economy, but it can also be a driver of it as well. People make spending decisions based on how the market is doing, so the volatility itself can impact real economic activity. Again, it might be self serving, but that’s how I justify watching every tick of the action 24/5 on the [Bloomberg] terminal.
Expansions don’t just die of old age; they get murdered. Often expansions end — and recessions start — because of some sort of major shock (e.g. geopolitical crisis causing an oil shock). But they could also be caused by some sort of collective loss of confidence that things aren’t so hot or soon won’t be so hot. Everybody decides to stop investing/hiring/building because they’re worried everyone else is gonna stop investing/hiring/building.
In today’s case you could imagine this collective loss of confidence happening both because there’s so much uncertainty about Trump’s trade wars and fears of further escalation, but also because there are so many accumulating global risks (Brexit, China slowdown, etc.).
I think the White House figured we could shake up/disrupt world trade and get away with it, since our economy is one of the least reliant on trade. This is why the White House ostensibly believes it is playing with house money, it will hurt China more than it hurts us, etc
What they may have underestimated was the behavioral economics of capital deployment — the degree to which businesses and households get spooked from erratic policy change.
What might cause a recession? Trade wars. Our country has prospered by doing what we do best, shipping it to the rest of the world, and getting in return what they produce well. The tariffs imposed so far have made a small dent in consumption and output.
But the threat that the global system of free trade might crumble, that should terrify any investor, any farmer and any consumer.