What are the Financial Indicators for a Potential Recession

Statistically speaking, two-thirds of chief economists believe that a global recession can be expected for the year 2023. It is said that a recession may last for only a few months, but it can take much longer for the economy to recover. Several indicators may lead to a potential recession. It is imperative that you are familiar with these factors being a part of the economy.  However, before diving into these factors, let’s start with the basics. 

Recession: A Brief

A significant and widespread decline in economic activity that lasts for a sustained period. In a recession, there is a reduction in the production of goods and services and a decline in employment, income, and spending. 

In simple words, during a recession, an economy goes through a slower growth process and, thus, begins to shrink. This impacts the overall economy of the country and leaves a haunting effect. Businesses and companies are majorly affected by a recession. 

Factually speaking, the time period for a recession is approximately 10 months. But what leads to this possible recession? Let’s find out!

Financial Indicators of a Potential Recession

There are several financial indicators that analysts and economists typically use to assess whether an economy may be heading toward a recession. Following is a list of the indicators for a potential recession: 

• Unemployment: The rise in the rate of unemployment means that companies are cutting back on hires, and thus, it can lead to a potential financial indicator for a recession. Furthermore, an increase in unemployment can be seen as a sign of economic weakness. As of July 2022, the rate of unemployment was calculated at 3.6%. 
• GDP (Gross Domestic Product): The Gross Domestic Product means the total number of goods and services being produced in the economy during a specific time period. A decrease in the GDP means that the productivity of the economy also decreases, thus, resulting in a recession. GDP is a measure of a country’s total economic output. When the GDP growth rate starts to slow down, it may indicate that a recession is on the horizon.
• A decline in real income: Real income refers to an individual’s or a household’s income adjusted for inflation. In other words, it is a measure of the purchasing power of income, taking into account the effects of price increases or inflation. A decrease in real income directly leads to a drop in purchasing power, thus, a potential indicator for recession. Furthermore, when there is a decline in real income, then it significantly impacts consumer demand and purchasing power.

• Consumer spending: Consumer spending is a key driver of economic growth. When people start to cut back on their spending, it can be a sign that a recession is on the way. Furthermore, it can also lead to a decrease in the sales of companies, and as consumer spending is a major driver of the economy, it can have a negative impact. 
• Business investment: When businesses start to cut back on their investment spending, it may indicate that they are worried about the future of the economy and may be preparing for a recession.
• Decrease in retail/wholesale sales: When consumer spending decreases, retail sales also see a significant amount of decline. Retail/wholesale sales are a key indicator of economic activity. When sales decline, it signals a broader slowdown in the economy, which can lead to a recession. Furthermore, with a reduced wholesale or retail sale, the profits are also impacted, thus, affecting the overall economy. 
• Stock market performance: If the performance of the stock market falls, then it can be an indicator that the investors are cutting back and are curious about the future of the economy, thus, leading to an overall impact on the same. 
• Decrease in industrial manufacturing of goods: If the industrial or manufacturing growth of the country is witnessing slow growth, it affects the sale and purchases, thus, leading to slower economic growth. 

Over the years, a Yield Curve has been a reliable source of predicting the recession. It is a graph that showcases the relationship between long-term and short-term interest rates. A bond with a long maturity period typically has higher yields due to the fact that investors are rewarded for their patience when they hold the bond for a longer period of time. The yield curve of long-term bonds inverts when interest rates are lower for short-term bonds than they are for long-term bonds. There has been an inverted yield curve a year or two before nearly all recessions since 1960 – this can be an early sign of a recession to come. 

Conclusion

In conclusion, several factors lead to a recession; however, while none of these indicators alone can definitively predict a recession, monitoring these trends and their interplay can provide valuable insights into the state of the economy and the potential for a downturn. It’s essential to keep in mind that recessions are a normal part of the business cycle, and it doesn’t necessarily mean that the economy won’t eventually recover. If you wish to learn more about the recession indicators further, head over to the Bhive Alts Investment website.