A Recession Is Coming (Eventually). Here’s Where You’ll See It First.

on Jul28
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Last week’s report on second-quarter gross domestic product showed that the economy slowed last spring. It also came exactly 10 years since the Great Recession ended, making this officially the longest expansion in American history. (Well, probably. More on that in a second.) So perhaps it’s no surprise that forecasters, investors and ordinary people are increasingly asking when the next downturn will arrive.

Economists often say that “expansions don’t die of old age.” That is, recessions are like coin flips — just because you get heads five times in a row doesn’t mean your next flip is more likely to come up tails.

Still, another recession will come eventually. Fortunately, economic expansions, unlike coin-flip streaks, usually provide some hints about when they are nearing their end — if you know where to look. Below is a guide to some of the indicators that have historically done the best job of sounding the alarm.

[The Federal Reserve is poised to lower interest rates for the first time since the Great Recession.]

One caveat: Economists are notoriously terrible at forecasting recessions, especially more than a few months in advance. In fact, it’s possible (though unlikely) that a recession has already begun, and we just don’t know it yet.

“Historically, the best that forecasters have been able to do consistently is recognize that we’re in a recession once we’re in one,” said Tara Sinclair, an economist at George Washington University. “The dream of an early warning system is still a dream that we’re working on.”

What to watch for: Rapid increases, even from a low level.

What it’s saying: All clear.

Discussion: The unemployment rate is near a 50-year low, but that isn’t what matters for recession forecasting. What matters is the change: When the unemployment rate rises quickly, a recession is almost certainly on its way or has already arrived.

Even small increases are significant. Claudia Sahm, an economist at the Federal Reserve, recently developed a rule of thumb that compares the current unemployment rate to its low point over the previous 12 months. (Both are measured using a three-month average, to smooth out short-term blips.) When that gap hits 0.3 percentage points, the risks of a recession are elevated. At half a percentage point, the downturn has probably already begun.

Unemployment is considered a “lagging” indicator, and it is unlikely to be the first place to pick up on signs of trouble. But what it lacks in timeliness, it makes up for in reliability: The unemployment rate pretty much always spikes in a recession, and it rarely rises much without one.

Which is why right now the unemployment rate should be a source of comfort: Not only is it low, it’s trending down. When that has been the case historically, there has been less than a one in 10 chance of a recession within a year, according to a Brookings Institution analysis that worked off Ms. Sahm’s measure.

Related indicators: Initial claims for unemployment insurance; payroll job growth.

Right now, American manufacturers are being battered by a global slowdown and by trade tensions. As of June, the index is still in expansion territory, but barely. Many economists think it will fall below 50 in the coming months but don’t expect a steeper drop.

Related indicators: New orders for capital goods; regional manufacturing surveys from Federal Reserve banks; the employment and compensation components of the National Federation of Independent Business’s monthly survey.

By that metric, the economy isn’t in trouble. Consumer confidence is basically flat compared to a year ago, but it has fallen since late last year.

Related indicators: Retail sales; average hourly earnings; real personal income.

O.K., this is cheating. But no single indicator can tell the whole story of the $20 trillion United States economy, and the measures that performed well in the past might not do so in the future. So it pays to keep an eye on a variety of data sources.

The indicators above are among the most common inputs into the formal models that economists use to forecast recessions. But many economists have a favorite indicator (or maybe a couple) that they also watch as a gut check.

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