Most people are worried about the economy, and the dreaded word “recession” is on many people’s lips. But how can you tell what’s actually happening and what’s not worth worrying about?
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GOBankingRates spoke to economists and financial professionals to get the inside scoop on what’s going on in America right now. Here are six ways to tell if a recession is coming and what you can do about it.
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Current Economic Outlook
Michael Faulkender, former assistant secretary for economic policy at the U.S. Department of Treasury and currently the dean’s professor of finance at the University of Maryland, provided a measured perspective.
“I do not think a recession is coming but I do think the recent slowdown will continue. There are parts of the economy that are not growing — manufacturing and housing are still struggling,” he outlined. “Other parts like healthcare and government spending are still expanding. The outcome is overall anemic growth, but not yet decline. What the economy looks like one to two years from now depends mightily on the economic policies implemented following the election.”
However, Albert “Pete” Kyle, distinguished university professor at the University of Maryland’s Robert H. Smith School of Business, offered a more cautious view.
“Altogether, risks are tilted towards a recession coming either later this year or next year, but it is not as obvious that this will occur as it was in 2007 or 2000,” he said. “Currently, there are some stresses in the banking system. Banks and non-bank investors are sitting on bad loans related to commercial real estate, particularly shopping malls and commercial office space. These stresses are significant. Compared to the 2008 financial crisis, they are better recognized and probably not as severe.”
Kyle also pointed out another concerning factor — the stock market.
“The stock market is currently at a very high level as a multiple of GDP,” the professor shared. “While earnings are strong, it is not clear whether for how long these high earnings will continue into the future. If there is a decline in corporate earnings, stock prices could fall a great deal.”
Professor Jonathan Ernest of Case Western Reserve University offered a more optimistic perspective. “Currently, the labor market has remained relatively strong, the rate of inflation has decreased, and GDP continues to grow year-over-year. None of these measures would traditionally signal an imminent recession.”
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6 Key Recession Indicators
Given these differing views, what signs should we be watching for? Here are six key indicators highlighted by our experts.
Yield Curve Inversion and Steepening
Abe Askil, CEO at Titan Capital Managers, pointed to a historically reliable indicator.
“Since the 1970’s, whenever the 10-year treasury minus the 2-year treasury yield went from being inverted (two-year treasury rate higher than 10-year), then steepened (10-year treasury higher than two-year), the U.S. entered a recession in every case. It has a perfect track record of calling recessions,” he said
The SAHM Rule
Askil also mentioned the SAHM Rule, which focuses on unemployment rates. “When the 3-month moving average of the unemployment rate rises by 0.5% or more relative to the lowest three-month average from the previous 12 months, the rule is triggered. The SAHM Rule was triggered in each of the last 9 recessions since 1960.”
Banking System Stress
Kyle emphasized the importance of monitoring the banking system. “Currently, there are some stresses in the banking system. Banks and non-bank investors are sitting on bad loans related to commercial real estate, particularly shopping malls and commercial office space.”
Consumer Sentiment
Anthony Termini, an investment advisor and Annuity.org expert, believes a good indicator or a potential recession is consumer sentiment.
“Consumer sentiment is the strongest indicator about what might happen in the future. We live in a consumer-based economy, which accounts for almost two-thirds of GDP,” he said. “When consumer sentiment turns negative, it could signal a slowdown in spending.”
Housing Market Trends
Termini also thinks housing trends are well worth looking at.
“Housing trends [are] a huge indicator because the more houses that get built, the more consumers need to fill them with goods,” he shared. “They create a ripple effect that impacts other industries across broad segments of the economy.”
Manufacturing Activity
Manufacturing activity is part of that follow-on economic effect of rising — or slowing — housing starts, shared Termini.
“This indicator can confirm changes in either consumer sentiment or housing starts. When it’s positive, it bodes well for the economy,” he said. “When it’s negative, check to see if confirms the direction of either consumer sentiment or housing starts.”
What To Do About It
Regardless of whether a recession is imminent, our experts agree that there are moves we all can and most likely should take. Here’s what you should consider.
Build an Emergency Fund
“Individuals can be better prepared by having a ‘rainy-day fund’ in case their income decreases, and by keeping their skills and resume up to date,” Ernest advised.
“A healthy emergency fund helps you feel more secure and confident in your finances, offers a longer runway if you face unexpected job loss, and acts as a buffer against economic uncertainties, recession or not,” added Brandon Galici, CFP and founder of Galici Financial.
Be Cautious With Major Financial Decisions
Kyle has some specific, actionable advice.
“If you search for a new job, make sure that the new one will be at least as secure as the old one. Do not quit your old job first, just so that you can search for a new one,” he said. “If you need a new car, buy a used one (but not too used) instead of a new one. Now is probably not the time to buy a new house. Listings are increasing, which suggests soft housing prices are ahead.”
Reassess Your Asset Allocation
Kyle shared that you should look at the ration of stocks to bonds in your retirement accounts.
“Given the huge appreciation of the stock market in recent years, selling off some stocks may be reasonable,” he shared. “If you are in your 40s, something like 60-percent stocks, 40-percent bonds, is typically wise.”
Pay Down High-Interest Debt
“Paying down debt, especially high-interest debt, is a smart move regardless of the economic outlook,” explained Galici. “As you eliminate debt, you free up monthly cash flow.”
Kyle agreed, adding: “Avoid credit card debt. Interest rates on credit cards are very high. Try to create a cash cushion of savings.”
Review Your Long-Term Investment Strategy
Galici reminded us that your investment approach should align with your personal goals and risk tolerance, not short-term economic predictions.
“Consider your age and time horizon,” he said. “Typically, the younger you are, the more you can lean into stocks for long-term growth.”
Keep Perspective
As in all things, it’s important to keep calm and carry on.
“My advice to people concerned about a pending recession is to just get over it — literally and figuratively,” Termini explained. “Recessions are part of the normal business cycle. Don’t panic. Recessions are always temporary, while expansions are enduring.”
Kyle left us with some powerful final words: “While it is not certain that a recession will occur in the next year, risks are tilted in that direction, so it is a good financial strategy to be prepared.”
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This article originally appeared on GOBankingRates.com: I’m an Economist: 6 Ways You Can Tell If a Recession Is Coming (And What To Do)
