Quick Answer
Economic uncertainty can be a sign of impending recession, but it's not always a guaranteed indicator. Rising debt levels, declining consumer spending, and stagnant GDP growth can also be warning signs. Economic indicators such as the inverted yield curve, declining manufacturing activity, and weakening labor market can provide further insight.
Economic Indicators of Recession
Economic uncertainty is often accompanied by a decline in economic indicators, such as the yield curve. An inverted yield curve, where short-term interest rates exceed long-term interest rates, can be an early warning sign of recession. A study by the Federal Reserve found that an inverted yield curve has preceded each recession since the 1950s.
Labor Market and Consumer Spending
Declining manufacturing activity and weakening labor market are also warning signs of recession. A decrease in manufacturing activity can be measured by the Institute for Supply Management’s (ISM) PMI, which has fallen below 50 in previous recessions. Additionally, a decline in consumer spending, which accounts for 70% of the US GDP, can also indicate an impending recession. A decrease in consumer confidence, as measured by the University of Michigan’s Consumer Sentiment Index, can signal a decline in spending.
Recession Predictive Models
Some recession predictive models, such as the Aruoba-Diebold-Scotti Business Conditions Index (ADS), use a combination of economic indicators to predict recessions. The ADS model has correctly predicted all recessions since the 1980s, except for the 2001 recession. Another model, the Leading Economic Index (LEI), tracks 10 economic indicators to predict future economic activity. A decline in the LEI can signal an impending recession, with a 90% accuracy rate since its inception in 1969.
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