How can you predict a market recession?
- The unemployment rate: During a recession, one of the first things that makes a movement is the rate of unemployment. Without a recession, this usually remains still and barely shows any movement, which is why it is said to be a lagging indicator. It is highly unlikely that it would be the first aspect to pick up signs of trouble.
- The yield curve: The term sounds fairly technical, it is — but fortunately it is one of the best indicators of a recession. A yield curve is basically a measurement of how confident investors are in the economy. In normal times, they demand high returns and are willing to tie in their money in the long term but during a recession or when they are nervous, they settle for lower rates. When the long term returns fall back in comparison to the short term ones, it is said that the yield curve has been “inverted.” The inversion of the yield curve predicts a high probability of a recession.
- Consumer sentiment: This is a monthly measure of consumer confidence. Based on 5,000 households, the index is calculated each month on the basis of a household survey of consumer’s opinions on current conditions and the future expectations of the economy. Based on a 3 month rolling average, if 15% of sustained decline is observed on the consumer sentiment index, there is said to be a recession. A sustained decline in the consumer sentiment index can stand as a reliable recession indicator.
- Quit rates: When workers are confident in the economy, they are more likely to look for better opportunities within the working environment. As they are able to grasp these opportunities, they take the step of leaving the current workspace voluntarily. During a recession, workers try their best to stay where they are so that they don’t risk not being able to attain another opportunity or in the worst case, they are usually terminated from the company – which contributes to the unemployment rate.
- Auto sales: When car sales are high, its a sign that consumers are feeling good and confident in the economy. Retail car sales have peaked before a recession and dropped significantly once it begins. It is a big sign that sales are falling, and can be considered as one of the signs of recession.
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