Recession Red Flags: What Variable Matters?

The following below is from The Finance Professor:

1. The Death Cross: 50 Day MA < 200 Day MA

Ignore the death cross: it didn't signal the decline of anything. By the time it crossed, markets had put in a short term bottom. In general, the stock market is a leading indicator of economic activity and we sit higher than October's levels, so no worries expected.

2. Widening High-Yield Spreads

Bond markets are very good at prediction. Widening junk bond spreads are an indicator of trouble, but the recent spike in junk spreads has been small in historical terms. In fact, high-yield "B" spreads are near the recent bottoms, so not in worry territory yet.

3. Inverted Yield Curve: is the 2 year yield > 10 year yield ?

Currently, the curve is not inverted, but careful inspection of the chart is extremely worrisome. Yield curve inversion has been almost a perfect predictor of upcoming recessions, although the joke among economists is that the inverted yield curve has predicted 12 of the last 10 recessions. Still, the chart is scary. First, the recent drop in the spread appears to have momentum, and historically has had lots of momentum until it went negative. Second, assuming that covid was not an economic recession, the economy has gone a very long time without a real recession. Money printing since 2009 is starting to become painful, especially with the backdrop of anti-globalization. Keep a close eye on this curve, as it is one of the more important variables.

4. Total Working People

The 80 year graph of employment shows that, prior to most of the recessions, employment had either already turned down or had peaked. Also the curve peaks are monotonic, in this instance meaning each pre-recession peak was higher than before. Currently we sit below the pre-covid employment peak, which is not a good indicator of an upcoming recession. Moreover, the steepness of the employment curve is not the type of environment where things should be shrinking. Total employment, along with the yield curve, are two of the most important indicators to watch. In particular, watch for employment or job openings to slow down - that will be a high-probability recessionary warning sign.