The bad news about the next recession: most economists won't predict it. The worse news: the few forecasters who will accurately predict the next recession will also be predicting recession for years of prosperity. Even though forecasts are not perfect, there are some warning signs that business leaders can use to assess the risk of a recession in the coming year.
Economists (including myself) did not predict the 2008-09 recession, nor the recessions of 2001, 1990, or 1982. However, we did anticipate the 1980 recession—which we thought would be mild. Oops.
There are some perma-bears who are always predicting doom and gloom. If a company follows their advice, the business will miss out on the good years by hunkering down too soon. Remember Pharaoh's dream: the fat years must be used to prepare for the lean years.
Here are the indicators that will be most useful for looking at the risk of a recession. Several of these indicators can be accessed via the FRED database, a great free service of the federal reserve Bank of St. Louis.
Dr. Bill Conerly based on data from the Federal Reserve
Interest rate spread between 10-year Treasury bonds and Federal Funds rate, 1950-2018
Yield Curve: the yield curve is a chart that compares long-term interest rates and short-term interest rates. For simplicity, we can look at the difference between the interest rate on the 10-year Treasury bond and the Federal Funds rate, which is an overnight maturity. Negative values, meaning short-term interest rates are higher than long-term rates, are red flags for recession, though not totally reliable. If you access the data from the FRED database, they do the arithmetic for you. (Data source: Federal Reserve. Available in FRED with series name T10YFF)
Dr. Bill Conerly based on data from the University of Michigan
Consumer expectations from the University of Michigan Survey of Consumers, 1950-2018
Consumer expectations: The University of Michigan's Survey of Consumers asks a number of questions about the current economic situation and expectations for the future. The overall consumer sentiment has proved to be useful (but not perfect), with the expectations subcomponent being a little better. (Data source: University of Michigan Survey of Consumers. The overall index is available in FRED with series name UMCSENT, but not the expectations component.)
