• Analysts have predicted a U.S. recession all year, but stocks are continuing to rise.
• Investors should watch three metrics that can predict economic downturns: the yield curve, leading economic indicators (LEI), and consumer confidence index.
• These indicators can provide insight into whether the current market performance is indicative of an upcoming recession or not.
Analysts have predicted a U.S. recession all year, but stocks continue to climb higher despite inflation dropping to 3% in June and an unemployment rate nearing a 50-year low at 3.6%. This has led investors to question if a recession is still possible or if it has been avoided altogether.
Leading Economic Indicators
Investors can use leading economic indicators (LEI) as an early warning system for changes in the business cycle and potential economic downturns. Three metrics that have been able to consistently predict recessions over time are the yield curve, LEI set of data points, and consumer confidence index.
Yield Curve Inversion
The yield curve represents the relationship between short-term and long-term interest rates on government bonds, with long-term bonds usually having higher yields than short-term ones due to the risk of holding their money for a longer period of time. An inverted yield curve often precedes recessions and suggests that investors are worried about near future events causing interest rates to fall due to an economic slowdown.
Leading Economic Indicators Set
The Conference Board compiles LEI which consists of building permits, stock prices, consumer expectations, average weekly hours worked and more – when these indicators start declining or show negative movement it could signal an impending recession ahead.
Consumer Confidence Index
The Consumer Confidence Index measures how confident consumers feel about their financial situation now compared to six months ago – when consumer confidence drops it indicates that people may be concerned about their job security or income levels which can lead them towards cutting back on spending as well as investment activities resulting in decreased demand for products/services overall thus leading towards an eventual recessionary environment .