Signs of a Recession

Susan Jung |

Is a recession coming? That's the big question investors are asking nowadays as the economy continues to slow and global trade creates uncertainty. There is no doubt the tariffs have slowed economic growth in the United States, and we believe that will likely continue. We continue to monitor conditions to determine if a recession is likely in the near future.

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There are many issues we examine on an ongoing basis to determine if a recession appears imminent. Here are five to consider. They are as follows:

1. Unemployment

The job market remains strong. If we begin to see weakening in employment data, that will suggest a slowdown in the economy. US steel recently announced they would be laying off hundreds of workers in Michigan because of low steel prices. Other companies appear to be considering layoffs as well. If the unemployment rate begins to rise, that's a sign of economic softness and potential recession pressure.

2. Global Economic Outlook
 
The United States is part of the global economy. If overall growth is slumping on a worldwide basis, the United States is sure to be impacted. It's very simple, if the world is suffering, the United States will suffer as well. China, Europe, and Latin America may have economic problems that could impact the US economy.

3. Yield Curve
 
The yield curve is currently inverted and that tends to be a sign of recessionary headwinds in the future. Bond investors will pay less interest on long-term assets if they believe the long-term outlook for the economy is cloudy. Don't believe those who would suggest that we do not have an inverted yield curve at present; we do. If the yield curve remains inverted, this will be a hint that investors are not optimistic about the economy. 

4. Manufacturing Data
 
If manufacturers and industries cut back on capital expenditure programs (as well as the manufacturing of goods), this will be a negative for economic growth. If industry is slowing, it's a sign that consumption likely will be slowing and that will have a negative long-term effect on economic growth. Manufacturing data that begins to soften tends to be an indicator of a slowdown in GDP which tends to occur prior to the recession.

5. Consumer Sentiment
 
Because the US economy is 70% consumption, negative sentiment will likely have a negative effect on overall economic growth. The administration has already canceled some tariffs in an effort to bolster the holiday season as tariffs will have an impact on consumption. Consumer attitudes precede behavior and tends to be a strong indicator of economic challenges. You can expect action by the administration if there continues to be an erosion in overall consumer sentiment.
 
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It is our assumption that economic growth will indeed slow. We have already positioned portfolios on the assumption of economic headwinds. Our fixed income and equity assets reflect our view that optimistic forecasts for economic growth are simply too difficult to achieve. We believe emerging data suggests our position is correct.
 
We examine these and other factors as we determine the likelihood of a recession. At present, we believe there is a 40% chance the US will fall into recession in 2020. There are already the beginnings of action taken by the administration to stop that from occurring in an election year. Additionally, you will also likely see pressure on the Federal Reserve to cut interest rates in a more dramatic fashion. They have declined to cut rates aggressively; that may change if data deteriorates.
 
We will continue examine conditions and adjust as needed. If you have any questions about this information, please let us know. Thank you!

The opinions expressed herein are provided for informational purposes only and are not intended as investment advice. All investments involve risk, including loss of principal invested. Past performance does not guarantee future performance. Individual client accounts may vary. Although the information provided to you on this site is obtained or compiled from sources we believe to be reliable, Destination Wealth Management cannot and does not guarantee the accuracy, validity, timeliness or completeness of any information or data made available to you for any particular purpose. Any links to other websites are used at your own risk.