Economic fluctuations are inevitable, but being able to anticipate a recession is crucial for individuals and businesses. In this article, we’ll break down recession indicators into three categories: early, simultaneous, and laggards. Understanding these signals allows you to better understand the economy and make informed decisions. 

Leading Indicators 

A leading indicator of recession is an economic measure that gives warning signs of an imminent recession. These indicators are considered precursors because they change before the economy begins to decline significantly. In other words, they act as early warnings, allowing analysts, economic policymakers, and investors to take preemptive action. 

  1. PMI below 50: The PMI, or Purchasing Managers’ Index, is an economic indicator that measures economic activity in the manufacturing sector. When a recession is imminent, this number will fall below 50, suggesting a contraction, indicating difficulties ahead. 
  2. Yield curve: The yield curve is often considered a precursor to recession because of the way it moves in anticipation of economic changes. When the curve inverts, it’s often an early sign of recession. 
  3. Consumer Confidence Index: Canada, like many other countries, issues a statistic on consumer confidence in the economy. When a recession approaches, consumer confidence typically declines, influencing spending and demand. 
  4. Commodity Price Index: A decline may reflect reduced demand, a precursor to economic difficulties. Right now, we’re seeing prices go up, but if those were to go down drastically, that could be a sign. 
  5. Stock index: Stock markets are often considered leading indicators because they react to investors’ expectations. A decline in stock market indices can indicate a loss of confidence in the economy. 

Note: These indicators are not infallible. With the help of economists from various banks, we regularly monitor these signals for you, ensuring a thorough understanding and appropriate response. 

Concurrent Indicators – Ongoing Recession Concurrent 

Indicators of a recession are economic measures that move as the economy goes through a period of contraction. Unlike precursor indicators, which change before the official onset of a recession, concurrent indicators reflect economic conditions in real time or with a slight lag. These indicators are useful for confirming that an economy is indeed in recession. 

  1. Negative economic growth: Two consecutive quarters of declining GDP signal a recession. 
  2. Sharp increase in the unemployment rate: A key indicator of the deterioration of the labour market. 
  3. Declining industrial production: Reduced manufacturing activity during the recession. 
  4. Declining retail: Decreased consumer spending. 
  5. Declining investment: Businesses are cutting back on spending due to economic uncertainty. 

Lagging Indicators – After the Recession Lagging 

Indicators are economic indicators that change after the economy has already begun to contract or recover. Unlike early warning indicators that provide early warning signals, lagging indicators usually confirm ongoing economic trends. 

  1. Business Bankruptcy Rate: Increases after the onset of a recession as businesses struggle to survive. 
  2. Interest rates on loans: Lowers to stimulate the economy after the onset of a recession. 
  3. Loan default rate: Increases when individuals can no longer repay their debts. 
  4. Office and housing vacancy rates: Increases as people can no longer afford to pay. 
  5. Corporate Earnings Growth Rate: Decreases due to a drop in demand during the recession. 

Conclusion 

So we can now see that the leading indicators have started to appear. We are also noticing an increase in simultaneous factors, such as the unemployment rate in the construction sector, which is increasing in Quebec. At the European level, we are seeing a decline in industrial production. Is the recession starting? Will central banks be able to stabilize the economy with a soft landing in 2024? 

By understanding these indicators, everyone can better understand business cycles. Whether you’re an investor, entrepreneur, or consumer, knowing these signals helps you make informed decisions in an ever-changing economic environment.