ISMS 32: 5 Signs of Impending Recession

Listen on

Apple | Google | Spotify | YouTube | Other

Click here to get the PDF with all charts and graphs

Warning Sign #1 – Inverted yield curve

  • It’s not the first time the Fed has fought inflation
  • Fed has been fighting inflation with its main tool
  • Steep rate hikes have historically preceded recessions
    • Fed’s tool to fight inflation is raising the federal funds rate
  • This is the fastest and most aggressive rate-hike cycle by the Fed since the 1980s
    • After the 0.25%-hike in Feb 2023, the current rate-hike cycle became the most aggressive since the 1980s
    • The Fed has hiked rates by 5.25% in the current cycle
    • This has resulted in short-term rates becoming higher than long-term (yield-cure inversion)
  • Yield-curve inversion signals 4Q23 US recession
    • All recessions in the US since 1968 were preceded by an inverted yield curve
    • As it turns, recession typically follows
    • Average time from inversion, until the recession started, was about 1 year (so 4Q23)

Warning Sign #2 – Peak employment

  • US is now at peak employment
    • Peak employment precedes recession
    • Unemployment now at 3.8% (same as April 2000)
    • Puts upward pressure on wages, which is inflationary
    • On the flip side, a strong labor market can keep the recession at bay

Warning Sign #3 – Slowdown in bank lending

  • Business lending has slowed; real estate and consumer loans flat
    • Warns about a slowdown in business activity

Warning Sign #4 – Leading indicators falling & bankruptcies rising

  • Composite leading indicators falling but seen a slight rebound recently
    • The indicator looks at factors aimed at providing early signals of turns in the business cycle
    • While the indicator has given false signals before, recessions have typically followed large falls
  • 72 US bankruptcy filings in 1H23, more than the previous two years
    • Private and public companies with over US$100m in assets at the time of bankruptcy filing
  • “Filings in the first seven months of 2023 surpassed total filings for the previous year”
    • S&P Global Market Intelligence recorded 64 corporate bankruptcy filings in July, the largest monthly total since March and more filings than in any single month in 2021 or 2022

Warning Sign #5 – Weakening consumer

  • Retail sales have been slowing, which typically precedes a recession
  • Consumer sentiment has fallen since 2020
  • Credit card debt at US$1trn and growing while past due bills are rising

 

Click here to get the PDF with all charts and graphs

 

Andrew’s books

Andrew’s online programs

Connect with Andrew Stotz:

About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

Leave a Comment