There Are Five Indicators That a Recession is Coming

A recession is now a matter of when, not if. As markets struggled to accept the certainty that the Federal Reserve will continue its most aggressive monetary tightening campaign in decades to squeeze inflation out of the US economy over the past week, the pulse of those flashing red lights intensified.

Even if doing so brings on a recession. And even if it comes at the expense of clients and companies outside the United States.

There’s now a 98% chance of a global recession, according to research firm Ned Davis, which brings some sobering historical credibility to the table. The firm’s recession probability reading has only been this high twice before — in 2008 and 2020. Over two-thirds of the US economy is comprised of consumer expenditure. Most of the time, economists base their predictions of a downturn on a range of indications.

Let’s examine five major trends:

1. The Powerful US Dollar

In the world economy and international finance, the US dollar has a significant influence. And at this moment, it is stronger than it has been in the past 20 years.

The dollar gains in appeal to investors worldwide when the US central bank rises interest rates, as it has been doing since March.

The dollar is viewed as a secure investment in any economic environment. Investors have even greater reason to invest in dollars during turbulent times, such as during a global pandemic or an Eastern European war, typically in the form of US government bonds.

2. The American Economy is Stagnant

The largest economy in the world is driven primarily by consumer spending. And shoppers in America are worn out.

Consumer spending has decreased after more than a year of steadily rising costs for almost everything, along with stagnant incomes.

Consumers are digging into their savings as a result of the difficulty brought on by inflation, according to a note sent on Friday by Gregory Daco, chief economist at EY Parthenon. According to Daco, the personal saving rate was only 3.5% in August, which is close to its lowest level since 2008 and far lower than its pre-Covid average of about 9%.

3. Corporate America is Making Cuts

For the most part of the epidemic era, business has been growing across all industries, despite record high inflation eating into earnings. That is due (again) to the perseverance of American consumers, as companies were able to pass on the majority of their higher expenses to customers in order to maintain profit margins.

The earnings boom, though, might not persist.

4. Greetings from Bear Country

In case anyone needs yet another awful historical comparison, equities are now on course for their worst year since 2008 and Wall Street has been dealt a whiplash.

However, things were completely different last year. Thanks to a flood of cash injected by the Federal Reserve, which unleashed a double-barrelled monetary-easing programme in the spring of 2020 to prevent financial markets from collapsing, equity markets flourished in 2021, with the S&P 500 rising 27%.

Bottom line: Until global inflation is under control and central banks relax their restrictions, there are currently few secure areas for investors to store their money.

5. Conflict, Skyrocketing Costs, and Radical Policy Clash

In no other country is the awful collision of economic, financial, and political tragedies more apparent than in the UK.

The UK has experienced price increases that are mostly caused by the catastrophic shock of COVID-19, followed by the trade interruptions brought on by Russia’s invasion of Ukraine, just like the rest of the world. The West has stopped importing Russian natural gas, which has caused energy prices to surge and supply levels to decrease.

Even without the other incidents, those were terrible.

With inflation over 10%, the highest of any G7 economy, Britons are already experiencing a cost-of-living crisis. Now, they are in a panic over rising borrowing costs, which might force millions of homeowners to increase their monthly mortgage payments by hundreds or even thousands of pounds.

Michael Burry Warns of Unstable Markets and Catastrophe

One of the few investors, Michael Burry, who predicted the financial collapse, worries that the present market chaos may be the beginning of a much worse tragedy.

Burry probably meant the Federal Reserve and other central banks who were rapidly boosting rates to tame stubborn inflation. The US dollar has reached record highs versus other foreign currencies, such as the British pound, due to the Fed’s aggressive rate hikes as well as external factors like the Russia-Ukraine war and China’s ongoing lockdowns.

In addition, the Bank of England started a $70 billion ($65 billion) bond-buying binge this week because the UK’s financial stability was being threatened by rising gilt yields. In an effort to support the Chinese currency, the People’s Bank of China is apparently getting ready for state-run banks to sell dollars and buy foreign yuan.

Rising rates, volatile currencies, and government efforts to control markets and avert economic catastrophes are all apparent warning signs to Burry, who is reminded of the frantic period leading up to the Great Recession.

Similar Theories

Similar worries have been raised by other academics, who warn that an overreaching Fed might cause a severe recession in the US or “stagflation,” in which inflation rises but growth stagnates and unemployment increases. They have also issued warnings that unstable markets and a decline in public confidence in policymakers could endanger investor and consumer confidence, undermining growth.

Burry gained notoriety for correctly predicting and profiting from the burst of the housing bubble in the middle of the 2000s; the book and movie “The Big Short” made reference to his bet.

The CEO of Scion Asset Management is also renowned for making last year’s bets against Elon Musk’s Tesla and Cathie Wood’s Ark Innovation fund, as well as for investing in GameStop before it turned into a meme stock. In addition, he called it “the greatest speculative bubble of all time in all things” and predicted it would burst in the “mother of all crashes” in June of last year.