Are we heading into a recession? 7 warnings signs to look out for

Alex Busson provides seven recession warning signs to ensure you’re as prepared as possible for whatever the future may hold.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Recessions normally happen every four to seven years. Since we haven’t had a recession for over 11 years, people are rightly asking: “Is another one overdue?” Below are seven recession warning signs, some of which are now flashing red.

1. Bond Inversions

Bonds are viewed as a safe-haven asset for their guaranteed yields.

This makes them reliable at predicting recessions.   

When investors are nervous, they’ll flee towards longer-term bonds, causing yields to drop. When long-term bonds pay less than short-term bonds, you have what’s called an “inverted yield curve”.

It has preceded every recession of the last 60 years. And it happened again in March 2019.

2. Rising Volatility

As investors start spotting recession warning signs, you can also expect faster, more pronounced swings in the stock market.

The VIX index measures volatility in the S&P 500.

By March 2020, the VIX had jumped 300% in three weeks. This was its highest level since the 2008 financial crisis.

3. Higher Demand For Dollars

The U.S. dollar is used in around 60% of global trade.

It’s widely accepted. You can buy and sell dollars easily, or move them into other assets.

Like bonds, the dollar has ‘safe haven’ appeal.

During the recent market crash, dollar demand spiked but has been falling since. This might be the next recession warning sign to watch.

4. Falling Copper Prices

Copper is an industrial metal used in houses and manufactured goods.

This makes it an excellent barometer of the economy. When things are booming, copper prices rise.

However, prices have been falling since 2018.

It’s another recession warning sign that’s now flashing red.

5. Credit Card Defaults

It’s obvious, when people are strapped for cash they start missing bills.

Yet not all bills are equal. Houses are a lagging indicator, because people will always pay their mortgage first.

Instead, they’re more likely to miss credit card and auto-loan payments.

Last year, The Guardian reported that default rate on UK credit card debt was at its highest for two years. In America, auto loan delinquencies have also surged.

6. Rising unemployment

When unemployment rises 0.5% from its lows, recession usually follows. And it’s a very accurate warning sign, with a perfect 70-year track record.  

As of February 1st 2020, unemployment was 0.3% higher than its November low. By this measure, the economy seemed to be holding up.  

However, unemployment is expected to explode higher due to the seventh recession warning sign:

7. The Black Swan

A “Black Swan” is an unpredictable event that significantly impacts the economy.

Today’s Black Swan is the coronavirus pandemic.

It has shut down huge chunks of the economy. It may be forcing you to take a hard look at your personal finances.

The latest figures still haven’t arrived, so it’s hard to know if we’re officially in a recession. However, it does seem almost certain.

GDP numbers are expected to be horrific, with some economists predicting a 30% slump and double-digit unemployment.

Recession Warning Signs Aplenty

Even before the coronavirus took hold, many of these recession warning signs were flashing red.

Now, with so much of the economy shut down, it seems impossible to avoid.

Nevertheless, recessions are a normal part of the economy. Some are deeper than others. What matters most is that you’re prepared.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »