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ISMS 32: 5 Signs of Impending Recession
9th October 2023 • My Worst Investment Ever Podcast • Andrew Stotz
00:00:00 00:09:35

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Warning Sign #1 - Inverted yield curve

  • It’s not the first time the Fed has fought inflation
  • Fed has been fighting inflation with its main tool
  • Steep rate hikes have historically preceded recessions
  • Fed’s tool to fight inflation is raising the federal funds rate
  • This is the fastest and most aggressive rate-hike cycle by the Fed since the 1980s
  • After the 0.25%-hike in Feb 2023, the current rate-hike cycle became the most aggressive since the 1980s
  • The Fed has hiked rates by 5.25% in the current cycle
  • This has resulted in short-term rates becoming higher than long-term (yield-cure inversion)
  • Yield-curve inversion signals 4Q23 US recession
  • All recessions in the US since 1968 were preceded by an inverted yield curve
  • As it turns, recession typically follows
  • Average time from inversion, until the recession started, was about 1 year (so 4Q23)

Warning Sign #2 - Peak employment

  • US is now at peak employment
  • Peak employment precedes recession
  • Unemployment now at 3.8% (same as April 2000)
  • Puts upward pressure on wages, which is inflationary
  • On the flip side, a strong labor market can keep the recession at bay

Warning Sign #3 - Slowdown in bank lending

  • Business lending has slowed; real estate and consumer loans flat
  • Warns about a slowdown in business activity

Warning Sign #4 - Leading indicators falling & bankruptcies rising

  • Composite leading indicators falling but seen a slight rebound recently
  • The indicator looks at factors aimed at providing early signals of turns in the business cycle
  • While the indicator has given false signals before, recessions have typically followed large falls
  • 72 US bankruptcy filings in 1H23, more than the previous two years
  • Private and public companies with over US$100m in assets at the time of bankruptcy filing
  • “Filings in the first seven months of 2023 surpassed total filings for the previous year”
  • S&P Global Market Intelligence recorded 64 corporate bankruptcy filings in July, the largest monthly total since March and more filings than in any single month in 2021 or 2022

Warning Sign #5 - Weakening consumer

  • Retail sales have been slowing, which typically precedes a recession
  • Consumer sentiment has fallen since 2020
  • Credit card debt at US$1trn and growing while past due bills are rising

 

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