The worst financial crisis that the United States has ever seen is the Great Recession of 2007 to 2009 since the Great Depression of the 1930s. No one can forget the collapse of the housing market, steep stock market losses, double-digit unemployment. However, the US economy is claiming to have regained full strength since the recession of 2009.
Economists have predicted that within a decade the US is going to face a recession again. However, the US is stubbornly denying that fact. In spite of rock-bottom employment and a booming stock market, economists fear that history would repeat itself very soon. But how can the US spot the recession coming its way? Here we’ve mentioned below 10 signs to look at for a looming recession.
- Drop-in Sales and Housing construction
The housing market is one of the major driving force behind the US economy. One-sixth of the GDP consists of the money spent by Americans on buying houses, building houses, renting and renovating, alone. That’s the reason why economists are keeping records of the no. of construction projects happening in each month.
- Unemployment bottoms out
During 2018, the registered unemployment rate was 3.7% which was the lowest recorded since the year 2019. Employers are forced to raise wages due to unemployment in order to attract talent in a constricted job market. However, economists can see the smoke arising before the economic fire. They very well know that low unemployment could be a major sign of looming recession. Just nine months after the unemployment rate had been noticed, the economy of the US drastically declined.
- Rising Inflation
Some level of inflation is good, just like wage growth. High level of inflation reduces the risk of unemployment and ensures the well-being of the workers. With an increase in the demand for consumer goods and retail prices, the rate of inflation also rises. But when inflation gets heated up, the Federal Reserve has to raise interest rates to cool down the economy. The main danger associated with raising inflation is that borrowing becomes more expensive.
- Runaway Wage Growth
Hourly wages and employee salaries are major expenses for businesses. Low unemployment leads to less no. of qualified workers on the job. Therefore, employers are forced to offer higher pay to talented workers. Wes Moss predicts that fast-growing wages are a major sign of arriving recession. Growth of wages even by 4% a year forces the business to cut jobs for a slow growth rate. In 2018, there was a 2.9% wage growth. Economists fear that slow and steady growth is leading to the possibility of future cutbacks.
- Sustained stock market losses
You can get a clear picture of a country’s overall economic growth by referring to its stock market. Paul Samuelson, an economist, mentioned that nine of the last five recessions have been predicted by the stock market. A professor of finance, George Morgan says that the stock market gives a sign of the recession before six months. When the stock market comes down it starts consuming long-term savings of consumers as a result spending stops.
- Quieter factories
Even though the US doesn’t manufacture much product as compared to other countries, it’s still a good indicator to look at for getting a view of the overall economy. Every month, the Institute of Supply Management is compiling the response into a number or index. US manufacturing is considered to be growing when the index is above 50. However, the number reduces with the shrinking activities of the factory. And the most recent report indicates the index to be merely above 50. The economy is already said to be in trouble.
- Temps face difficulties
When business is going well, companies tend to hire temporary workers for help since the workforce isn’t strong enough to meet the demands. When demand for their services or products starts shrinking, the companies let go off their staffs. Temporary staffs reflect the growth of a company. The confidence enjoyed by the company indicates their situation. Declining temp hiring is the sign of an arriving recession. If compared to the last year temp staff, this year data shows that there are fewer jobs which is a matter of concern.
- Yield Curve Flips
One of the most reliable signs of a looming recession is the inverted Treasury yield curve which is a little graph which denotes the current situation of an economy. The treasury bonds of the US are the most reliable and low-risk investment. Since the yield curve is relatively low, investors are hesitating to put money into bonds. When investors are not confident about the economy, the interest rates go down. Usually, yields for longer-term bonds are higher than short-term bonds. But when it flips upside down, a recession can be noticed around the corner.
- Oil Price Shocks
The rising gas prices are a headache for every resident regardless of any country. People often ignore that besides paying more charges, the rising price possesses much more danger. Negative supply shock can lead to a rapid increase in oil or gas prices. In this situation, the supply of oil dries up, in turn, forcing the prices to increase quickly because the demand is still high. Not only it affects the customers, but the increase in the oil price virtually affects the type of economic activity. When spending on oil increases, spending on other things reduces.
- Rising Interest Rates
You must be well aware of how interest rates affect your finances. But interest rates as a sign of a recession isn’t known to many people. Natural interest rate is the interest drawn from people considering the fundamentals of the economy. This is the tricky part which causes troubles for the economy of a country. When the interest rate rises too high, the recession arrives. At the same time, when a recession arrives, they have to again raise interest above the natural interest rate. This cycle pushes the country’s economy into the periphery making the situation even worse.