Predictors of a Recession

In a market economy, or a modified market economy such as the U.S. economy, production and consumption are connected in various "markets." A market is simply a place where consumers can go to buy things from producers and producers can go to sell things to consumers.
A grocery store is an example of a physical market. People who want to consume food go to the grocery store and buy it from producers through a series of middlemen. The store itself is one of the middlemen, and there are usually others along the way (distribution companies, for example). The labor market is a more abstract sort of market. In this market, businesses who want to consume work pay people to produce labor. In the stock market, consumers and producers buy and sell percentages of ownership of companies (see How Stocks and the Stock Market Work for more information).

As you can see, almost everybody is both a producer and a consumer acting in more than one market. If you have a job, you are a producer of labor. Whenever you go shopping, you are a consumer of goods.

There are no totally reliable predictors. These are regarded to be possible predictors.[3]

Stock market drops have preceded the beginning of recessions. However about half of the drops of 10% or more since 1946 have not resulted in recessions.[4] Also, approximately half of the stock market decline came after the beginning of recessions.

Inverted yield curve,[5] the model developed by Fed economist Jonathan Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate. Another model developed by Federal Reserve Bank of New York economists uses only the 10-year/three-month spread.

It is, however, not a definite indicator;[6] it is sometimes followed by a recession 6 to 18 months later.


The three-month change in the unemployment rate and initial jobless claims.[7]
Index of Leading (Economic) Indicators (includes some of the above indicators).[8]

Attributes of Recessions

Broadly speaking, a nation's economy is the production and consumption of goods (food, clothes, cars) and services (repairs, lawn-mowing, haircuts) in that nation. Anybody producing or consuming things in a country (and that's just about everybody) plays some role in the economy.

­Production and consumption are intertwined. In order for people to consume things, someone has to produce those things. And in order to produce things, you need to consume things (you need to consume natural resources and people's labor, for example).

A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression. Although the distinction between a recession and a depression is not clearly defined, it is often said that a decline in GDP of more than 10% constitutes a depression.[2] A devastating breakdown of an economy (essentially, a severe depression, or hyperinflation, depending on the circumstances) is called economic collapse.