Despite the sophistication of data and technology today, professional forecasters have missed 96% of the world’s recessions.1 But that fact hasn’t stopped the predictions! Take a look at these five indicators that experts say signal the next downturn.
In 2009, James D. Hamilton, oil shock macroeconomist and a professor of economics, noted that the increased price of oil in historical models had made a material contribution to the decline of the Growth Domestic Production (GDP) — significantly after the oil shock pricing, referencing the timeframe preceding the Great Recession of 2007–2008.2
Eight years later, Hamilton analyzed additional documentation of 25 million Americans’ credit and debit card habits along with one million mobile purchases to question if oil pricing in 2014–2015 was different than previous periods that equated oil with economic predictions. He confirmed that significantly slower GDP growth often follows oil price increases; however, oil price decreases appear to have little net effect.3
What hasn’t been factored into these observations is the change with the U.S. as a net oil exporter. This new dynamic may conflict with past indicators, and unless the barrel of oil price doubles from last year’s, this clue’s reliability remains unknown.
The kingpin of recession forecasts is rising interest rates. Since economists predict another rate hike before the end of 2018, a recession in the near future seems to be a given. New reports cite 2019–2020 for the next event while the real estate industry sets its sights on 2020.4
In 2018, Zillow Research said half of its experts surveyed (realtors and economists) expect a recession in Q1 2020, stating that 4.4 million U.S. homeowners still owe more on their mortgages than their homes are worth with a little more than 15% of these owing at least twice as much as their home’s value.5
Another recession forecast comes from the credit union field, representing more than 110 million U.S. members who hold $1.1 trillion in deposits. Economist Steve Rick from the Credit Union National Association Mutual Group said that the growth rate gap is an indicator of a short recession coming. The growth rate gap (loan growth less deposit growth) is now 4%, meaning the loan growth has increased by 10% while the savings growth is at 6%. As this gap narrows to zero, Rick says consumers will spend less.6
Trade war chatter has put copper metal pricing on the radar for financial experts who view this metal, known as Dr. Copper in economic circles, as a classic recession clue. Copper, used in many different industries like construction, manufacturing and consumer products, experienced a 20% price reduction for September futures delivery.7 But, other economists believe the price decrease is short-term due to the geopolitical climate.
Two counterintuitive indicators of recessions noted by financial researcher and writer Raul Elizalde include the yield curve and low unemployment. Historical data shows that when the longer-term rates drop below short-term rates and unemployment claims fall below 300,000, a recession follows. Elizalde charts three timeframes when this occurred, from the late 1980s through 2007.8
Other indicators beyond the five listed include asset bubbles, the Chinese economy, Bitcoin, and more. Although the list of predictors is long, knowing what triggers and when they will occur is slim, especially since only 148 out of 153 worldwide recessions have been predicted! The only certainty is that this economic-type tsunami which could last up to 18 months or more is guaranteed to come in at an unpredictable time
1”How Well Do Economists Forecast Recessions?,” IMF Working Paper, March 2018
2”Oil prices and the economic recession of 2007-08,” James D. Hamilton,” June 16, 2009
3”Comments on "Lower Oil Prices and the U.S. Economy: Is This Time Different?," James D. Hamilton, November 30, 2016
4”2020 Vision: Experts Say Next Recession Looms at Decade's End,” Zillow Research, May 22, 2018
5”Negative Equity Dips Below 10 Percent for the First Time Since the Market Bottom,” Zillow Research, May 30, 2018
6”Copper — a metal with a history of predicting economic trouble — hits 1-year low, nears bear market,” CNBC, July 19, 2018
7”Why A Recession In 2019 Is Possible When Unemployment Is At 50-Year Lows,” Forbes, June 2, 2018