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
|Yield curve (10-year to 1-year Treasuries)||—||—|| |
|Unemployment claims|| |
|Unemployment rate|| |
|Conference Board Leading Index|| |
|ISM New Orders minus Inventories||—|| |
|Fed funds rate vs. nominal GDP growth|| |
Source – RBC Wealth Management; economic indicators as noted below
For a detailed view of each indicator, please see the charts and text that follow.
Source - RBC Wealth Management, Bloomberg, U.S. Federal Reserve, National Bureau of Economic Research
The 10-year Treasury yield is normally higher than 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 plummeting as European and Japanese investors, dissatisfied with negative yields in their home debt markets, rushed into U.S. Treasuries, thereby pushing the yields they offer sharply lower. There are few, if any, signs that credit conditions have tightened in the U.S. or elsewhere. The yield curve de-inverted in October, but this does not signal “all clear”—historically, the yield curve has typically done this before the recession starts.
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. Although the smoothed trend of weekly claims ticked higher in December, the rise was driven by a two-week surge in claims that RBC Capital Markets, LLC Chief U.S. Economist Tom Porcelli believes may have resulted from inadequate seasonality calculations. Claims moved sharply lower in the weeks that followed, and in January the downtrend reasserted itself. The next few months will bear close watching with Boeing-related layoffs not yet fully factored in and coronavirus effects a wild card. The lowest weekly posting since 2007 was back in April 2019; history suggests that if the trend were to turn higher from here without a new weekly low being set, a recession would most likely materialize in the spring or summer of 2020. For now, we are leaving the signal green. Watch this space.
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 back at its most recent low of 3.5%, the lowest level in almost 50 years, we note that unemployment has been sitting below 4% for almost a year. It would take only a couple of monthly readings at 3.9% or higher to shift this indicator out of expansionary territory. However, given Labor Department estimates of 6.8 million unfilled jobs in the U.S. versus 5.8 million unemployed, it seems quite possible the unemployment rate is not yet ready to turn higher.
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. The LEI’s most recent posting was just one tick above its level of a year prior. However, the historical comparison is influenced by the notably elevated state of the LEI a year ago, and by a couple of short-term factors that have since moved back into the positive column. Were this indicator to fall convincingly into negative territory, it would suggest a recession would be likely to start in the summer or fall 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 fell below zero several months ago, but has since moved back above that threshold. We are leaving it rated yellow (caution) until it moves further into positive territory.
Fed funds rate vs. nominal GDP growth
Source - RBC Wealth Management, Federal Reserve, Bureau of Economic Analysis
This indicator is the most decidedly positive of all. 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 Q4 2019, the nominal GDP y/y growth rate was about 4.0%. The fed funds rate is now sitting at 1.75%—that’s 2.25% below the run rate of the economy, or nine 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.
Non-U.S. Analyst Disclosure: Jim Allworth, an employee of RBC Wealth Management USA’s foreign affiliate RBC Dominion Securities Inc.; and Frédérique Carrier, an employee of RBC Wealth Management USA’s foreign affiliate RBC Europe Limited contributed to the preparation of this publication. These individuals are not registered with or qualified as research analysts with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since they are not associated persons of RBC Wealth Management, 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.