From 2007 until 2009, we experienced the worst financial downturn since the Depression. It was worse than the dot-com bubble. The effects were so bad that many Americans and industries are still recovering, trying to return to their pre-2007 state.
What is a recession?
Let’s start with some terminology. Most economists define a recession as six consecutive months, or two quarters, of economic decline.
What are the signs of a recession?
Predicting financial markets and economic behavior is a little like reading tea leaves. There isn’t one single indicator that will tell you what’s going to happen over the next several years.
Having said that, there are a few things that experts look to when predicting if a recession is on the way.
1. Jobs. Here’s an interesting fact: every recession in the past 50 years has coincided with a spike in jobless claims. The U.S. has added jobs for more than 100 consecutive months - the longest streak on record. And the unemployment rate is at 3.7%. As chief economist at Capital Economics Paul Ashworth points out, with jobless claims at a 50-year low, “it would be highly unusual if the economy was already in recession (or anywhere near it) right now.”
2. Stock markets. Many people are worried that the massive swings in daily share prices are a sign of impeding doom. Even though there were drops prior to the 2001 and 2007 crashes, the stock market isn’t a strong predictor of a possible recession.
3. Gross domestic product (GDP). Remember, it takes six months of negative economic growth to make a recession. Last quarter, the U.S. GDP dropped from 3.1% to 2.1%, which is still positive growth. What doesn’t look encouraging is the trade war with China. Exports of goods and services equate to roughly 12% of the U.S.’s GDP. If this trade war continues, the GDP could fall further.
4. Yield curves. This concept is a little more technical, but it’s a strong indicator of economic health. When the yield curve inverts, meaning the interest rate on short-term treasury bonds grows higher than the rates on long-term treasury bonds, a recession can follow. An inverted yield curve has preceded the past seven recessions. And in December, the yield curve inverted for the first time in a decade.
What do the experts say?
Some indicators are positive, and some are negative. Not very much help.
We know what Paul Ashworth thinks, but what are other economists saying?
Former Federal Reserve chair Janet Yellen thinks that while the odds of a recession have increased, they’re still low. “I think the U.S. economy has enough strength to avoid that," she said.
Ioana Marinescu, University of Pennsylvania assistant professor of economics, disagrees. She expects a recession almost any day because it’s been almost 12 years since the last one. But even she admits that accurate predictions are nearly impossible.
Just like with the indicators, experts are split as well. But as a final point of interest, many experts agree that if a recession does hit, trade wars would likely be the proximate cause. So those who are curious about the economy’s health should pay attention to how trade negotiations progress moving forward.