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

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

By: Alex Busson | March 30, 2020

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.