Charts to watch for signs of the next U.S. downturn
Chhavi Singhal
Peak XV (ex-Sequoia) | PE | Goldman Sachs | IIM-L | 5M+ Views | CFA | FRM
1. The Yield Curve
The gap between long and short dated yields (10-year and 2-year) turning negative has been a reliable predictor of recessions. The yield curve has started flattening in recent months.
2. Output Gap
The output gap between the economy’s actual and potential GDP fell ahead of the last two recessions. Currently, the output gap is nearly closed, but not yet in the 'overheating' territory.
3. Boom-Bust Barometer
The Boom-Bust Barometer devised by Ed Yardeni at Yardeni Research measures spot prices of industrial inputs like steel, copper and lead scrap, normalized by initial unemployment claims. The measure fell before or during the last two recessions and is currently below its 2018 peak.
4. Housing Market
Housing starts and building permits have fallen ahead of recessions. Housing starts and permits fell to the lowest level since Sep 2017 in June.
5. Earnings Growth
S&P 500 earnings growth dipped ahead of the last recession. Earnings growth is expected to slow slightly this year and more next year, but remain in the high single digits or low double digits in 2019.
6. Exports
Exports from China are important as weak Asian exports tend to coincide with weak global and U.S. growth. South Korea's export growth came to a halt in June. The United States and China have fired the first shots in what could become a protracted trade war.
7. Investment-Grade Yields
Risk premiums on IG corporate bonds over Treasuries have topped 2% during or just before six of the seven U.S. recessions since 1970. Spreads on Baa-rated corporate bonds rose to 2 percent this month.
8. Misery Index
Misery Index adds together the unemployment and the inflation rate. It typically rises during and prior to recessions. It has nudged higher in 2018 but is still relatively low.
