ISMS 32: 5 Signs of Impending Recession

Warning Sign #1 - Inverted yield curveIt’s not the first time the Fed has fought inflationFed has been fighting inflation with its main toolSteep rate hikes have historically preceded recessionsFed’s tool to fight inflation is raising the federal funds rateThis is the fastest and most aggressive rate-hike cycle by the Fed since the 1980sAfter the 0.25%-hike in Feb 2023, the current rate-hike cycle became the most aggressive since the 1980sThe Fed has hiked rates by 5.25% in the current cycleThis has resulted in short-term rates becoming higher than long-term (yield-cure inversion)Yield-curve inversion signals 4Q23 US recessionAll recessions in the US since 1968 were preceded by an inverted yield curveAs it turns, recession typically followsAverage time from inversion, until the recession started, was about 1 year (so 4Q23)Warning Sign #2 - Peak employmentUS is now at peak employmentPeak employment precedes recessionUnemployment now at 3.8% (same as April 2000)Puts upward pressure on wages, which is inflationaryOn the flip side, a strong labor market can keep the recession at bayWarning Sign #3 - Slowdown in bank lendingBusiness lending has slowed; real estate and consumer loans flatWarns about a slowdown in business activityWarning Sign #4 - Leading indicators falling & bankruptcies risingComposite leading indicators falling but seen a slight rebound recentlyThe indicator looks at factors aimed at providing early signals of turns in the business cycleWhile the indicator has given false signals before, recessions have typically followed large falls72 US bankruptcy filings in 1H23, more than the previous two yearsPrivate 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 2022Warning Sign #5 - Weakening consumerRetail sales have been slowing, which typically precedes a recessionConsumer sentiment has fallen since 2020Credit 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 booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master Class