Is U.S. Economy Doomed for a Recession? Six Key Recession Indicators to Watch

Since mid-July, global stock markets have seen heightened volatility, with major indices pulling back between 10-20% from their recent highs. The turbulence was further exacerbated when an unexpected jump in U.S. unemployment rate to 4.3% in July triggered a global selloff. With that, concerns over an economic recession have resurfaced. Is a recession truly on the horizon? This article presents six indicators that can help you assess when a recession might hit by looking at various aspects of the economy.

Is U.S. Economy Doomed for a Recession? Six Key Recession Indicators to Watch

• Indicator 1: Sahm Rule Recession Indicator
• Indicator 2: Drawdown of US NBER Recession Indicators
• Indicator 3: MM Recession Probability for US
• Indicator 4: US Philly Fed SPF Recession Probability Index
• Indicator 5: US Fed Excess Bond Premium Recession Probability
• Indicator 6: US Probability of Recession in A Year (10Y-3M Model)

Indicator 1: Sahm Rule Recession Indicator

Former Federal Reserve Economist Claudia Sahm developed a method to identify the onset of a recession. According to her approach, if the 3-month moving average of the unemployment rate rises by 0.5% from its low during the past 12 months, the economy is either in or about to enter a recession. This indicator, known as the Sahm Rule Recession Indicator, has accurately predicted all past recessions.

With July’s unemployment rate rising sharply to a much-higher-than-expected 4.3%, the Sahm Rule Recession Indicator has reached 0.53%, passing the recession threshold for the first time since the 2020 pandemic and sparking fears of an imminent recession.

Nevertheless, Claudia Sahm recently emphasized that while the Sahm Rule can track the overall trend in unemployment, it does not distinguish whether increased unemployment is driven by reduced labor demand or increased labor supply. With the recent uptick in unemployment largely driven by an increase in labor supply, the Sahm Rule has likely overstated the weakening from the labor demand side.

Indicator 2: Drawdown of US NBER Recession Indicators

Beyond the job market, we can also assess recessionary pressures by looking at the NBER recession indicators, a more comprehensive gauge of economic contractions.

MacroMicro compiles the NBER Recession Tracker based on the definition of a recession by the National Bureau of Economic Research (NBER) and the key economic indicators the NBER takes into account when determining business cycle turning points. Such indicators include nonfarm employment, industrial production, real manufacturing and trade industry sales, real personal income excluding current transfer receipts, real personal consumption expenditures, and real GDP/GDI along with their average.

When more indicators start to decline, the greater the magnitude and the longer the duration, the higher the probability that the U.S. economy will enter a recession.

As the chart shows, none of the latest NBER recession indicators have shown any pullback. That is, each indicator is around its three-year peak, or even reaching new heights. For instance, the industrial production index reached a new high of 103.99 in June, and real personal consumption expenditures have also continued to set records. Additionally, total nonfarm employment has not declined. Based on NBER’s criteria, the U.S. economy has shown no signs of a recession.

The NBER Recession Tracker presents the 3-year drawdown for each indicator, that is, how much each indicator has retreated from its 3-year high. A value of 0 means the indicator is either at or surpassing its 3-year peak, while a negative value suggests the indicator has fallen from its highest point in over the past three years.

Indicator 3: MM Recession Probability for US

MacroMicro has also developed US - MM Recession Probability, a recession probability indicator for the U.S. economy based on definitions and research from organizations like the NBER and OECD. Historically, a rapid rise above 50% in the indicator has been a precursor to a recession in the U.S. Currently, the August reading stands at 11.4%, suggesting that a recession is not here yet.

Indicator 4: US Philly Fed SPF Recession Probability Index

The Federal Reserve Bank of Philadelphia estimates the likelihood of negative GDP growth for the current and next four quarters based on data from the Survey of Professional Forecasters (SPF).

The latest results from the Q3 2024 SPF indicates a recession probability of 16.06% for the current quarter, 21.01% for the next quarter, and 24.99% for the next four quarters. Although the probabilities have slightly increased, they remain relatively low.

Indicator 5 & 6: Recession Probabilities Based on Bond Rates

The four indicators discussed above are based on economic data and surveys. We can also examine the possibility of an economic downturn from the perspective of the bond market. Below we look at two more indicators based on corporate/ government bond yields.

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