Here Are The Recession Warning Signs To Watch

Last week, I wrote a detailed piece in which I explained that U.S. recession risk was rising quite rapidly and that the coming recession is likely to be far more severe than most economists expect because there are so many dangerous new bubbles inflating currently and because the global debt burden is much worse today than it was before the Great Recession. In the current piece, I will show more warning signs of the coming recession as well as discuss reliable recession indicators to keep an eye on as we get closer to the recession.

The first chart is of the New York Fed’s recession probability model, which is warning that there is a 27% probability of a U.S. recession in the next 12 months. The last time that recession odds were the same as they are now was in early-2007, which was shortly before the Great Recession officially started in December 2007. This recession indicator has underestimated the probability of recessions in the past several decades (it never rose higher than 42% in 2008, when we were already in a recession), so the probability of a U.S. recession in the next 12 months is likely even higher than 27%.

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The New York Fed’s recession probability model is based on the 10-year and 3-month Treasury yield spread, which is the difference between 10-year and 3-month Treasury rates. In normal economic environments, the 10-year Treasury yield is higher than the 3-month Treasury yield. Right before a recession, however, this spread inverts as the 3-month Treasury yield actually becomes higher than the 10-year Treasury rate – this is known as an inverted yield curve. As the chart below shows, inverted yield curves have preceded all modern recessions. The 10-year and 3-month Treasury spread inverted in May, which started the recession countdown clock.

(Click on image to enlarge)

The Leading Economic Index (LEI), which is comprised of economic indicators that lead the overall economy, has been slowing down quite rapidly in recent months. When the year-over-year growth rate of this index drops into negative territory, recessions typically occur shortly after. While the current LEI slowdown hasn’t dipped into negative territory yet, anyone who is interested in monitoring the risk of a recession should keep an eye out for that scenario.

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