Recession Indicators

Recessions hurt stocks, credit and commodities, while usually helping high quality bonds. Because markets fall before recessions are officially declared, traders watch indicators that have historically warned of downturns in advance. No single signal is perfect: some give false alarms, others arrive late, and their reliability can change as the economy evolves. Using several indicators together gives a better picture than relying on one.

Who declares US recessions?#

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months. It looks at employment, income, spending and production, and often announces start dates many months after the fact. The two negative GDP quarters rule of thumb is not the official definition. See GDP.

Key indicators#

The yield curve's record#

The 3 month to 10 year Treasury curve inverted before each US recession since the late 1960s. Economists at the Federal Reserve Bank of New York publish a recession probability model based on this spread. But the 2022 to 2024 inversion, the longest in decades, was not followed by a recession within the usual window, prompting debate about whether quantitative easing, pandemic distortions or strong household finances weakened the signal.

The Sahm rule#

The Leading Economic Index#

The Conference Board's LEI combines indicators such as average weekly manufacturing hours, jobless claims, new orders, building permits, stock prices, the yield spread and consumer expectations. Sustained declines have preceded past recessions, but the LEI fell for an extended period in 2022 and 2023 without a recession, another example of a signal weakened by unusual conditions.

Market based signals#

• Stock market declines, especially in cyclical sectors.
• Widening credit spreads.
• Falling copper prices and commodity weakness. See Copper.
• Rapid Fed rate cut pricing in futures markets.

Using indicators sensibly#

1. Combine several signals across different parts of the economy.
2. Look at trends and breadth, not single readings.
3. Remember leads vary widely, from months to years.
4. Expect false positives, especially after structural shocks.
5. Watch markets themselves, which often move before data.

Frequently asked questions#

What is the most reliable recession indicator?#

The yield curve inversion has the longest track record, but it gave a long false signal in 2022 to 2024; combining it with labour market and credit indicators is more reliable.

What is the Sahm rule?#

A signal that a recession has begun when the three month average unemployment rate rises 0.5 percentage points above its low of the previous 12 months.

Who declares a recession in the US?#

The National Bureau of Economic Research, which considers a broad range of economic data and often announces dates well after a recession begins.

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