U.S. recession indicators

Sep 20, 2019 | By Jim Allworth, Kelly Bogdanova, Frédérique Carrier


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RBC Wealth Management’s Global Portfolio Advisory Committee monitors six major economic indicators to gauge recession risks. The table directly below compiles our view of recession risks based on each indicator’s current position and recent movement. The interactive charts that follow show how these indicators have moved over time, with U.S. recessionary periods highlighted. Below each chart is an explanation of the indicator and our view of its current status.

RBC Wealth Management U.S. economic recession scorecard

economic recession scorecard

Source – RBC Wealth Management; economic indicators as noted below

For a detailed view of each indicator, please see the charts and text that follow.


Yield curve

Source - RBC Wealth Management, Bloomberg, U.S. Federal Reserve, National Bureau of Economic Research

The 10-year Treasury yield is normally higher than the 1-year Treasury yield, but this relationship usually inverts several quarters before a U.S. recession begins. The monthly data inverted in August 2019, suggesting a U.S. recession could get underway in the late summer or autumn of 2020. Most yield curve inversions are caused by the Fed pushing short-term rates higher in an effort to cool down an overheating economy. This time, however, the inversion was caused by the 10-year Treasury yield declining as European and Japanese investors, dissatisfied with negative yields in their home debt markets, increasingly purchased U.S. Treasuries, thereby pushing the price of those bonds higher and the yields they offer sharply lower. There are few, if any, signs that credit conditions have tightened in the U.S. or elsewhere.

Unemployment Insurance claims

Source - RBC Wealth Management, U.S. Bureau of Labor Statistics

A bottoming of unemployment claims has reliably preceded the arrival of a U.S. recession, with the cycle low typically occurring several quarters before the recession’s onset. Currently, the smoothed trend of weekly claims continues to move lower. The lowest weekly posting since 2007 was back in April, so if the trend were to turn higher from here without a new weekly low being set, then history suggests a recession would most likely materialize in the spring or summer of 2020. We note that the GM strike is likely to produce a spike in claims over the next few weeks, which could conceivably push the trend higher. We would wait to see where claims settle after the dispute is resolved before drawing conclusions one way or the other.

Unemployment rate

Source - RBC Wealth Management, U.S. Bureau of Labor Statistics

Once the unemployment rate turns the corner and begins trending higher, the start of a recession is typically two to six months away. While recent data puts the unemployment rate only one tick above its most recent low of 3.6 percent, which was the lowest posting in almost 50 years, we note that unemployment has been sitting below four percent for almost a year. It would take only a couple of monthly readings at 3.9 percent or higher to shift this indicator out of expansionary territory. However, given Labor Department estimates of 7.3 million unfilled jobs in the U.S. versus six million unemployed, it seems quite possible the unemployment rate is not yet ready to turn higher. In our view, further declines in the unemployment rate can’t be ruled out—stay tuned.

Conference Board Leading Economic Index (LEI)

Source - RBC Wealth Management, Conference Board, Department of Commerce

This indicator is something of a hybrid; it is put together by the Conference Board using 10 monthly economic variables. Three of these (Unemployment Insurance claims, the yield curve, and ISM New Orders) figure in the calculation of our “Recession scorecard,” so there is a bit of double counting here; we don’t know exactly how much, because the Conference Board’s method of dynamically weighting the 10 variables is proprietary. Whenever the LEI has fallen below where it was a year earlier (shown as negative values on the chart), a recession has always followed—typically, about six months later. Currently, the LEI sits about 1.5 percent above where it was a year ago. We think it would take two to three months of weakening data from here to push the year-over-year change into negative territory. Were this scenario to unfold, it would suggest a recession would be likely to start in the summer of 2020.

ISM New Orders minus Inventories

Source - RBC Wealth Management, Bloomberg, Institute for Supply Management

The ISM Manufacturing Index is often referred to as a leading indicator, but in our view it has not been very useful as such, having missed some important turns in the economy by wide margins. But two components of the index, taken together, have a good track record of signaling recessions as they begin or shortly before they begin. The difference between the New Orders component and the Inventories component has fallen below zero near the start of most U.S. recessions. But it has also occasionally registered a false positive, signaling that a recession was imminent when none occurred. Therefore, we view this as a corroborative indicator—one to pay attention to if other, longer-term indicators are saying a recession is on the way. It has just fallen fractionally below zero and bears watching.

Fed funds rate vs. nominal GDP growth

Source - RBC Wealth Management, Federal Reserve, Bureau of Economic Analysis

Since the federal funds rate came on the scene in the early 1950s, there has never been a U.S. recession that was not preceded by the fed funds rate rising above the year-over-year nominal growth rate of the economy (the growth rate before adjusting for inflation). In Q2 2019, the nominal GDP growth rate was about four percent. The fed funds rate is now sitting at two percent—that’s 2.00 percent below the run rate of the economy, or eight 25 basis point Fed rate hikes from here. This indicator is saying borrowing rates are just not high enough to choke off growth in the U.S. economy. And in our view, they don’t look likely to get there anytime soon.


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Non-U.S. Analyst Disclosure: Jim Allworth, an employee of RBC Wealth Management USA’s foreign affiliate RBC Dominion Securities Inc., contributed to the preparation of this publication. This individual is not registered with or qualified as a research analyst with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since he is not an associated person of RBC Wealth Management, he may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts.

Non-U.S. Analyst Disclosure: Frédérique Carrier, an employee of RBC Wealth Management USA’s foreign affiliate Royal Bank of Canada Investment Management (U.K.) Limited contributed to the preparation of this publication. This individual is not registered with or qualified as a research analyst with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since she is not an associated person of RBC Wealth Management, she may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts.

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