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The global economic system experiences periodic cycles of growth and contraction. As individuals and businesses navigate these economic fluctuations, it becomes crucial to identify early warning signs of a potential recession. This article highlights ten key indicators that suggest we may be on the brink of an economic downturn. Experts’ views on the severity and the timing of the recession vary. However, indications or signs indicate that the country is headed for recession. These signs include:
Don’t Get Blindsided: 12 Economic Alarms Pointing to a Looming Recession
- Low Consumer Spending
- A Contraction in the Gross Domestic Product
- Increase in Unemployment
- Low Manufacturing Activity
- Fall in Personal Income
- Inverted Yield Curve
- Volatility Index
- Low Industrial Output
- Tight Credit Conditions
- Interest Rates
- Fall in Investments
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Inflation indicates that a recession is likely to occur in a country. In a country like the US, where consumer spending is one of the biggest drivers of the economy, an increase in prices of essential commodities and utilities combined with no growth in consumers’ income will likely slow down their consumption rates, adversely affecting the economy.
Low Consumer Spending
If overall consumer spending slows down, a recession is likely to occur in the future. This is one of the clear signs of a recession on the horizon. Consumers generally slow down on spending if they lose their employment, think the job market is terrible, or their work hours are cut down. Another reason for low consumer spending is the higher prices of items and services caused by inflation. Consumers lower their spending to increase their savings rate.
A Contraction in the Gross Domestic Product
Gross Domestic Product or GDP is the metric used to measure a country’s economic output or the market value of goods and services. Consumer demand and spending play some of the most critical factors in calculating the GDP. If a country’s GDP declines, it indicates that a recession is likely to occur.
Increase in Unemployment
Another clear indication that a country is headed for a recession is the increase in unemployment rates. The spike in unemployment can occur when companies, organizations, etc., reduce their workforce due to an adverse economic event or situation. The beginning of a recession is marked when there is an indication that the national unemployment rate in a country has increased by 0.50% or more across three months or if the rates are lower than they have been in the last year.
Low Manufacturing Activity
Manufacturing of all kinds of goods encounters low activity when there is a reduced demand for goods from the general public. This can occur due to inflation and low consumer spending, which all together indicate that a country is likely headed for a recession. The low manufacturing activity increases the prices of finished goods, which further results in low demand from retailers and consumers.
Fall in Personal Income
An economy likely headed for recession results in reduced hours of employment and job losses. Once an individual’s income fails to meet the basic standards, they cannot spend on goods and products. In addition to the decrease in personal income, the rise in inflation also hinders an individual’s ability to spend even on necessities and groceries.
Inverted Yield Curve
A yield curve is said to be inverted when the long-term interest rates drop below short-term interest rates. Once a yield curve is inverted, it suggests that the market lacks confidence in the economic prospects. An inverted yield curve is one of the more reliable signs or warnings of an incoming recession.
The volatility index, or the VIX, was introduced by the Chicago Board of Options Exchange to help investors measure the different levels of fear, stress, and risk the market showcases. If the VIX values are greater than 30, it is an indication that there is an increase in volatility in the market. A high-value VIX indicates that a recession can occur anywhere shortly.
Low Industrial Output
When a country undergoes a downturn, most companies and organizations reduce production to minimize risk. This significantly impacts the number of required goods, resources, materials, and labor, which all further impact sales and lead to an increase in unemployment and layoffs. These low industrial outputs and low sales have a domino effect which leads to clear signs of a recession likely occurring in the country.
Tight Credit Conditions
Once a bank’s willingness to provide loans gets tightened, a recession will likely occur in the country. As the credit conditions in banks tighten or turn negative, consumers and financial and banking institutions are being negatively impacted. Surveys that track a bank’s willingness to lend have flashed warning signs as the lending and credit conditions in the country show signs of an oncoming recession.
Another sign that a country is headed for a recession is an increase in interest rates to deal with rising inflation. As inflation and interest rates rise, a recession is bound to occur.
Fall in Investments
If organizations and people invest less, it could mean they have less money to invest or want more cash in hand because they are afraid of a bleak future. Investors are more cautious of their investments because of the other signs that the country is headed into a recession. As investment rates fall in the country, businesses are affected, resulting in the domino effect that ultimately leads to a recession.
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