Recession in sight? Four traditional and four strange indicators

T.The idea for economists right now is whether the US is in a recession or entering a recession, and is closely watching several indicators for the answers.

The economy is not in a declared recession, although opinions are mixed as to whether it could be or on the verge of plunging into a recession. The last time the United States was in a recession, as stated by the National Bureau of Economic Research, it was a short two-month period at the start of the pandemic. First there was the Great Recession.



GDP: Perhaps the biggest indicator of recessions is GDP growth. A historical rule of thumb is that two consecutive quarters of negative GDP growth constitute a recession.

Indeed, all of the last 12 recessions identified by the NBER have seen at least two quarters of negative GDP growth and, conversely, every instance of at least two quarters of negative GDP growth has subsequently been declared a recession.

So when the Bureau of Economic Analysis announced in a revised estimate that GDP fell at an annualized rate of 0.6% in the second quarter, economists took notice. This came after negative GDP growth of 1.6% in the first quarter.

Job growth: However, another important indicator is against the idea that the economy is in recession: the country’s surprisingly resilient labor market. Employment growth has averaged 378,000 over the past three months, a very strong pace.

The unemployment rate is also incredibly low given the prospects for a recession. While it has recently risen to a still low 3.7%, it has reached a historic 3.5% in recent months, matching the ultra-low level it was just before the pandemic, when the economy was solid and growing.

Industrial production: Another indicator of a recession is the decline in industrial production. While economic growth as measured by GDP is stagnant, industrial production in factories in the United States has remained there.

Manufacturing production increased by 0.7% in July after declining slightly in June. Overall, production grew 3.2% year-on-year.

House for sale: Home sales are another indicator of a recession because if sales start to decline, it can mean that people cannot afford to shop at home. This can result in a slowdown in new construction, which means fewer jobs in that sector.

The real estate market is particularly sensitive to the Federal Reserve’s rising interest rates, as this results in higher mortgage rates. The Fed has embarked on its most ambitious rate hike cycle in decades to tame inflation, so the housing market and home sales are naturally starting to take a hit. The average rate on a 30-year fixed-rate mortgage reached 5.89%, Freddie Mac reported this week, the highest since 2008.

New home sales in July plummeted from the previous month, dropping a whopping 12.6% last month to a seasonally adjusted annual rate of 511,000, according to a Census Bureau report.

Additionally, existing home sales plunged 5.9% in July, the sixth consecutive month of declines, according to a report from the National Association of Realtors. Sales of existing homes fell 20.2% from a year ago and have accelerated in recent months.

The start of housing, which measures the annualized change in the number of new residential buildings that have begun construction, fell by a hefty 9.6% in July, the Commerce Department said in a report.


Copper: An interesting recession indicator, which in a sense links GDP growth, industrial production and housing together, is the copper index. As copper prices start to fall, it shows that demand for the metal, which is critical in construction, manufacturing and household goods, is falling, which means people are spending less and a recession could be at the bottom. horizon.

Copper has been a strong indicator of recessions in the past and is so well regarded that some call it “Doctor Copper”.

Copper is now trading at around $ 3.55 per pound. This is a steep and aggressive drop from the nearly $ 5 peak in late February, a drop of more than 28% in just a few months.

Campbell Harvey, a professor of finance at Duke University’s Fuqua School of Business, told a Washington Examiner At the beginning of this summer that of all commodities, copper is the one that most closely follows what is happening in the general economy. He said that other commodities, such as oil, are not as good indicators due to the complexity of supply chains, embargoes, etc.

Champagne: One indicator of a recession is the so-called champagne index. Consumers typically drink champagne when things are going well in their life. This can translate more broadly into the economy because if a recession is breaking out, people will feel less well, they may be fired and, overall, they are less likely to buy champagne.

History shows that the indicator was a reliable indicator. Champagne consumption rose to 23.2 million bottles in 2006, before dropping to about half by 2009, according to Bloomberg. NielsenIQ data indicates that sparkling wine sales fell every month in 2022 compared to the previous year.

Men’s underwear: Another indicator of a recession that some are looking at is the overall sales of men’s underwear. Former Fed Chairman Alan Greenspan was reportedly very interested in men’s underwear sales because he speculated that underwear was the last piece of clothing men will replace, even if it starts forming holes.

When people have less money to spend, they may skimp or put off buying new underwear because it’s the least forward-facing piece of clothing. So, if people have less money in their bank accounts and the economy is in a recession, sales of men’s underwear should go down.

“If you were to use this as a barometer, the most important retail sales to watch are Fruit of the Loom and Hanes from Walmart and Target, where most of America buys its underwear,” said the analyst at Morningstar David Swartz.


The word “recession”: Two other unusual indicators are based on perceptions of a recession itself. The “R-Word Index” was coined from Economist about three decades ago and refers to recessive risk analysis by calculating the frequency of the word “recession” used in the stories of major newspapers.
Google Trends is the modern version of the R-Word index. Google Trends allows people to analyze a keyword and see how often it is typed into Google’s huge search engine. Searches for the word “recession” increased before the Great Recession, during the period of the brief pandemic recession, and increased again in late July, but have cooled down a bit since then.


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