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| 5 Recession Warning Signs Investors Should Be Watching |
Most investors know that there are some warning signs that the economy may be heading into a recession, but most don’t know what they are. The risk factors in this article will help you figure out which of the 5 warning signs to look out for and how to protect your investments from them. Whether you’re about to start investing or have been investing for years, these tips will serve as an excellent reminder of what to watch out for and how to prepare yourself financially when these recession risks come up.
1) Consumer credit
Consumer credit is one of several key indicators that investors should be watching. While an increasingly cash-strapped consumer is typically seen as a good thing, high levels of personal debt can pose risks to financial institutions (meaning banks and credit unions). And if enough consumers are struggling to make ends meet, banks may start to see loan losses rise—which isn't good for their bottom line. Generally speaking, large increases in borrowing can be a red flag. But you'll also want to keep an eye on debt delinquency (i.e., people not paying back what they owe) or default rates (i.e., when loans go bad).
2) Wholesale inventories
The top of a recession is often marked by a rise in wholesale inventories. If businesses suddenly have a surplus of goods on their hands, you can bet they’ll begin discounting those goods as quickly as possible. That’s an early sign that they’re beginning to reduce production and therefore signaling that demand is shrinking. Also, check recent wholesale inventory growth trends against other economic indicators—specifically GDP—and see if there are any correlations between rising or falling wholesale inventories and recessions.
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3) Corporate capital spending
It’s usually one of the first things to fall off a cliff in an economic downturn. This is because companies typically spend more on new facilities, equipment, and technology when times are good, but quickly yank their spending as they run into trouble (hence why they’re called non-discretionary expenditures). Falling capex has been one of our biggest recession warning signs over recent years. Companies often cite uncertainty about future demand as a reason for trimming investment plans.
4) Residential investment
The housing market has come back strongly since 2008, but it’s important to note that it’s not fully recovered. Builders still haven’t added all of those homes lost during the downturn—let alone increased their production to meet growing demand. If residential investment continues to grow rapidly, it could be a sign that builders are trying to beat any potential increases in interest rates down the road. Additionally, supply shortages could also put upward pressure on prices over time as buyers compete for fewer available properties.
5) Yield curve dynamics
The yield curve is a graph that compares interest rates on Treasury bonds of different maturities. If interest rates on long-term Treasuries are higher than short-term ones, it suggests investors expect inflation to rise or growth to fall, perhaps both. When short-term rates rise above long-term ones, it is often viewed as a sign of an impending recession, since it means investors have less confidence in economic growth and thus require more compensation for lending.
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