An End Has a Start: Keeping an Eye on Recession Indicators

Key Points

  • Second-longest expansion likely to make it to longest; but we’re starting to see a few markings that peak growth is drawing nigh.

  • LEI, yield curve and yield curve-based recession models not yet flashing red.

  • But consumers’ confidence—in general and about the labor market—suggest caution is warranted.

There is much to cheer about the U.S. economy; so perhaps it’s heresy to bring up the topic of recession. Although I believe the runway between now and the next recession is reasonably long; it perhaps looks a bit like the runway at LaGuardia—long enough to land the plane, but fraught with potholes and construction obstacles.

As seen below, the current recovery/expansion is now the second-longest in history; but also the shallowest. I think we will get to the record-breaking point in about nine months, but it’s still appropriate to highlight the signs to look for to get a sense of when the next recession will descend.

2nd Longest Expansion

Source: Charles Schwab, Bureau of Economic Analysis, FactSet, as of June 30, 2018.

The Treasury yield curve is known as one of the most consistent recession indicators. The curve shown below represents the spread between the 10-year Treasury note yield and the 3-month Treasury bill yield. Not only has the curve steepened a bit recently, due to the back-up of longer yields; it’s not yet close to inverting, which tends to precede recessions.

Yield Curve Not Yet Flashing Red

Source: Charles Schwab, FactSet, Federal Reserve, as of October 4, 2018.

The Federal Reserve Bank of New York keeps a recession probability model, using the aforementioned version of the yield curve. You can see below that it’s been steadily rising and is approaching 15%. Obviously that’s a low probability, but at its highest reading since 2008.

Recession Probability Up, But Still Low

Source: Charles Schwab, Federal Reserve Bank of New York, as of September 30, 2018. Model uses difference between 10-year and 3-month Treasury rates to calculate probability of a recession 12 months ahead.