3 Recession Indicators and What They Mean

We never see it coming… until we do

The economical definition of a recession is two consecutive quarters of gross domestic product (GDP) decline. Unfortunately, quarterly reports are a trailing indicator, meaning they do not predict the advent of a recession but rather confirm it happened after the facts.

Because a recession can only be confirmed after it takes effect, we tend to be caught off guard. This often leads to panic, mass selling on the market, large job losses and further economic declines. Declaring a recession becomes a self-fulfilling prophecy. The vicious circle that it creates will damage peoples’ savings and health levels tremendously. Fortunately, if we look at the previous 100 years, there are several indicators we can use to predict a looming recession.

Yield Curve Inversion

A yield curve is a graphical comparison of similar financial instruments’ interest rates. By looking at the yield curve of US Treasury Bonds over several maturities (1, 2, 5, 10 years for example), we can establish the relative health of the economy at a certain point in time.

In a growing environment, one would expect long-term interest rates to be higher than short-term one’s due to the increased uncertainty of longer-term investments…