Recession: 3 Indicators That Scream Trouble Ahead for the U.S. Economy

RecessionThree economic indicators I pay close attention to are all suggesting we are headed toward, or are already in, a recession.

The first recession indicator is the employment data. For May, the Bureau of Labor Statistics reported that the U.S. economy added 38,000 jobs—the least amount of jobs created in a month in about six years. The employment figures from March and April were revised lower as well. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, June 3, 2016.)

While mainstream economists will say the poor May jobs numbers are a “one-time event,” after the trillions of dollars in new paper money the Federal Reserve has created and after years of record-low interest rates, jobs growth should be booming in America, not suffering. The bottom line: poor jobs growth is recessionary.

A second data point that suggests a recession is ahead is the manufacturing figures. Specifically, I pay attention to new orders at U.S. manufacturers; this is because new orders at manufacturers are a clear sign of current demand in the U.S. economy.

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The chart below plots the year-over-year percentage change in new orders at U.S. manufacturers.

New Orders at U.S. Manufacturers

Source: Federal Reserve Bank of St. Louis, last accessed June 8, 2016.

This chart scares me. It indicates new orders at manufacturers have been declining since late 2014! When new orders plunge, it means demand in the economy is weakening—another sign warning of a recession.

This next chart actually shows the probability of a recession in the U.S. economy.

probability of a recession in the U.S. economy

Source: “Smoothed U.S. Recession Probabilities,” Federal Reserve Bank of St. Louis, last accessed June 8, 2016.

The probability of a recession in the U.S. economy is at its highest level since June of 2009 (this is when the Great Recession was near its end).

Dear reader, to me this all seems too similar to 2007.

A significant number of indicators are pointing toward an economic slowdown in the U.S. economy. (In addition to the three I have talked about here, corporate earnings are collapsing, consumer spending is weak, personal income isn’t growing, and so on.) Just like in 2007 when the economic data was turning negative, people weren’t paying attention and then bang, all of a sudden the economy grinds to a halt.

Moving to stocks, the Dow Jones Industrial Average has gone nowhere over the past 18 months. The index today sits below where it stood in the opening days of January 2015. As I have written many times, the stock market spent 2015 putting in a huge top. And in putting in that top, the stock market, which is a leading economic indicator, is warning us of trouble ahead.