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October 2024 Recession Watch Thumbnail

October 2024 Recession Watch

Since last month's update, another recession indicator has been triggered. Recession indicators describe changes in specific economic data that have preceded previous recessions. Indicators do not guarantee a recession will occur, nor do they indicate how much the economy might slow or for how long. The next indicator we would expect to see ahead of an economic contraction would be a rise in the unemployment rate, followed by a period of net job losses.

Summary of Recession Indicators:

  • 10-2 Year Treasury Yield Curve Inversion - Triggered July 7, 2022
  • 10 Year-3 Month Treasury Yield Curve Inversion - Triggered October 25, 2022
  • Federal Reserve Bank of New York Recession Probability - Triggered December 1, 2023
  • Sahm Rule Recession Indicator - Triggered August 2, 2024
  • The Steepening of the Yield Curve - Triggered September 4, 2024
  • The Conference Board's Leading Economic Index (LEI) - Triggered September 19, 2024
  • Negative Jobs Report - Not Currently Triggered
  • GDP-Based Recession Indicator - Not Currently Triggered
  • National Bureau of Economic Research (NBER) - Not Currently Triggered

With so many triggered indicators how can we avoid a recession?

Keynesian Economics, developed by John Maynard Keynes, posits that during economic downturns, government intervention through fiscal policy, such as deficit spending, can stimulate aggregate demand, thereby preventing or mitigating recessions. The U.S. government is currently running a budget deficit of 6.7% of GDP. The U.S. has never run a deficit this large other than during WWII, the Global Financial Crisis, and COVID-19. The moral of the story is that if you borrow enough money, you can postpone the economic pain.

Explanations and Details:

Inverted and Steepening Yield Curve

An inverted yield curve, where short-term interest rates are higher than long-term rates, is a key economic sign because it has often predicted recessions. In 1986, Dr. Campbell Harvey, a finance professor at Duke University, found that the inversion between the 10-year Treasury note and the three-month Treasury bill was a reliable recession predictor. His model was first based on data from four past recessions. Since then, the model has correctly predicted four more recessions without any false signals, including the recession during the COVID-19 pandemic. On average, the yield curve has been inverted for about 12 to 18 months before a recession starts. The recent inversion, which began on October 25, 2022, lasted over twenty-two months, marking the longest period of inversion without a recession.

N.Y. Fed Recession Probability

The New York Fed's U.S. Recession Probabilities Report is an important economic indicator that estimates the likelihood of a recession within the next 12 months. This report is based on the yield curve spread between the 10-year Treasury note and the 3-month Treasury bill. The methodology was developed by economists Arturo Estrella and Frederic Mishkin, who showed that an inverted yield curve—where short-term interest rates are higher than long-term rates—has historically been a reliable predictor of economic downturns. The current U.S. recession probability over the next twelve months is 57.05%, which may seem like a coin flip until you consider that the long-term average is 14.85%. The probability has never reached this level without a recession following.

The Sahm Rule

The Sahm Rule Recession Indicator, developed by economist Claudia Sahm, serves as a coincident indicator that identifies the start of a recession often before the National Bureau of Economic Research (NBER) makes its official declaration. This rule is triggered when the three-month moving average of the U.S. unemployment rate increases by 0.5% or more from its lowest point in the preceding 12 months.

Leading Economic Index®

The Conference Board Leading Economic Index® (LEI) for the U.S. declined by 0.2% in August 2024 to 100.2, following an unrevised 0.6% decline in July. Over the six-month period between February and August 2024, the LEI fell by 2.3%. In August, the US LEI remained on a downward trajectory and posted its sixth consecutive monthly decline.

Negative Jobs Report

 A negative jobs report signals a decline in job creation and often precedes periods of economic slowdown. It typically includes a rise in unemployment and a significant reduction in payroll growth, reflecting weaker business confidence and hiring. This indicator is closely monitored as a sign of a cooling labor market. Historically, sustained job losses or stagnant job growth have occurred in the months leading up to a recession. While one bad report alone may not indicate a recession, multiple reports showing deteriorating labor conditions can point to broader economic weakness.

Negative GDP (Gross Domestic Product)

Two consecutive quarters of negative GDP growth, known as a "technical recession," have been a common indicator of economic downturns since the 1970s. While this metric is straightforward and measurable, it's not the official definition used by economists or the National Bureau of Economic Research (NBER) in the U.S. The NBER considers a broader range of factors, including employment, income, and industrial production, to date recessions. Historically, the two-quarter GDP decline has reliably predicted recessions, with only one exception since 1948. Though simplified, this makes it a timely and generally accurate indicator of economic contractions.

 NBER

The National Bureau of Economic Research (NBER) is a private, non-profit organization widely known for its role in dating recessions in the United States. Unlike the standard "technical recession" definition of two consecutive quarters of negative GDP growth, the NBER uses a more comprehensive approach. It considers a range of economic indicators, including employment, real income, industrial production, and wholesale-retail sales, to determine the start and end of recessions. By analyzing these various factors, the NBER provides a more nuanced and accurate assessment of economic health. This thorough methodology ensures that recession dating reflects broader economic trends rather than relying solely on GDP figures. However, it's important to note that it is generally apparent to most people by the time the NBER declares that a recession has begun. By this point, the economy is often already well into the downturn.