Is an economic meltdown on the horizon? Key indicator predicts the timing of the impending recession
There has been a growing buzz recently about the possibility of the US economy heading towards a recession, as several indicators are flashing warning signs. On June 1, investment research platform Game of Trade provided a detailed analysis of the economic indicators that suggest a potential recession on the horizon. The analysis highlighted the crucial role of housing market trends and unemployment rates in predicting a downturn.
According to the analysis, housing serves as a vital leading indicator for recessions, with rising unemployment being the most significant characteristic of economic downturns. The analysis also recognized that historically, there has been an average gap of about 5.5 years between recessions, suggesting that the next one may not occur until 2026 if this pattern holds. However, the analysis cautioned that economic cycles are not solely determined by average timing, as external shocks like oil crises, pandemics, and market crashes have historically triggered recessions, making them difficult to predict.
Nevertheless, one reliable precursor to a recession is a weakening housing market. Data tracking two-year housing sales reveals that when housing markets start to falter, a recession often follows with a slight delay. The analysis from Game of Trade also found a strong correlation between housing market trends and unemployment rates. By shifting housing market data forward by 18 months, they discovered a near-perfect correlation with upcoming recessions and recoveries.
The platform explained that this correlation exists because housing is highly sensitive to interest rates. When the Federal Reserve raises rates, the housing market immediately feels the impact, while the rest of the economy takes more time to experience the lagging effects of rising rates. Additionally, the analysis observed that the unemployment rate takes time to reach its lowest point during recessions and then begins to rise. The only exception to this pattern was in 2020 when the pandemic caused an immediate and massive economic shock.
Currently, the unemployment rate has been increasing since April 2023, marking about a year of continuous increase. Historical comparisons show that it took about one year of rising unemployment before the recessions in 2000 and 2006 and approximately 1.5 years in 1989.
Therefore, if the predictions of the housing market hold true, a recession could potentially occur by late 2024. However, the historically low unemployment rate might delay its onset. Furthermore, significant government spending in recent years could further postpone the next recession. Similar to the heavy spending seen in the 1960s, which delayed the recession until spending levels normalized, the current economic landscape may mirror this pattern.
