5 recession indicators that have moved out of the danger zone after flashing economic red flags

5 recession indicators that have moved out of the danger zone after flashing economic red flags
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  • Five recession indicators that were flashing a warning sign about the economy have since retreated.
  • Ned Davis Research said its Recession Probability Model has plunged to 2%, suggesting “minimal odds” of an economic downturn.
  • “The reversal of these historically important indicators shows why it is risky to rely on a few indicators that support a particular view,” NDR said.

Various economic indicators that suggested a recession was imminent not too long ago have since retreated, according to Ned Davis Research.

That means investors probably don’t have to worry about an economic recession occurring any time soon. That’s an about-face from just a few months ago when various economists and market strategists were still bracing for a recession.

From the Leading Economic Indicator Index to the inverted yield curve, NDR highlighted five recessionary signals that should no longer be the cause of concern for investors.

“The reversal of these historically important indicators shows why it is risky to rely on a few indicators that support a particular view,” NDR strategist Joseph Kalish said in a Friday note.

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These are the five recession indicators that are no longer flashing red as the resilient US economy continues to power forward.

1. NDR’s Recession Probability Model

NDR’s internal Recession Probability Model is derived from state employment and income data, and when it hits the 50% level, it flashes an imminent recession warning.

The model surged to 43.5% in December, just shy of the 50% trigger level, but it has since plunged to just 2.1% in February thanks to several data revisions and seasonal factor updates, according to NDR.

That indicates “minimal odds” of a recession at this time.

RPM

2. Household employment levels

“The household employment survey had been much weaker than the establishment survey entering this year. Adjusting household employment to the payrolls concept saw a large gain of 352,000 in March, following three consecutive months of decline. The only times that had happened was during and immediately after the GFC and during the pandemic,” Kalish said. 

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3. Gross domestic income

Measuring the US economy by income levels is less popular than the consumption-based GDP measure, but it does offer insight into how healthy US income levels are. 

“In theory, the two measures should be equal, since one person’s spending is another person’s income,” Kalish explained. But those two economic measures have not been equal more recently, sending warning signs about unsustainable growth in the economy. 

GDP was notably stronger than GDI for four consecutive quarters, with annualized GDP above 2% while GDI had failed to hit 2% during that stretch. But that finally reversed in the fourth quarter, when GDI surged to an annual rate of 4.8%, far outpacing the GDP reading of 3.4%. 

4. Leading Economic Index

“The Conference Board’s LEI had declined for 23 consecutive months, driving its six month change and diffusion indexes into contractionary territory for the economy. In February, the LEI ticked up 0.1% and the Conference Board no longer expects a recession,” Kalish said. 

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You can read more about the recent reversal in the LEI index here.

5. Inverted yield curve

An inverted yield curve, which occurs when short-term interest rates rise above long-term interest rates, has long been a closely watched recession indicator, but since going negative in July 2022, the yield curve recession signal has failed to materialize. NDR believes that will continue to be the case.

“Finally, 525 bp of Fed rate hikes and an inverted yield curve were supposed to generate a recession by now. Our two indicator composite gave a contraction signal in October 2022. Since that signal, the Coincident Economic Index has gained 2.3%,” Kalish said. 

Yield curve
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