Why Track Recession Indicators?
Recessions crush cyclical earnings and trigger bear markets. Recognizing one early lets you rotate into defensives before consensus catches up. Recognizing a recovery before consensus lets you add risk cheaply.
The 10 Signals
1. Inverted Yield Curve (10Y–2Y)
Hit rate: 7 of 7 recessions since 1955. Lead time: 12–18 months average. Status in 2026: dis-inverted late 2024; historically the dis-inversion is a sharper late-cycle signal than the inversion itself.
2. Sahm Rule
Triggered when the 3-month moving average of the unemployment rate rises by 0.5 percentage points above its 12-month low. Hit rate: has triggered before every recession since 1950. Status 2026: already triggered mid-2024 in some readings.
3. Leading Economic Index (LEI)
The Conference Board's LEI composite. Six consecutive monthly declines has preceded every recession since 1960. Status 2026: been in decline for extended periods; normal rules may need adjustment given recent post-COVID distortion.
4. ISM Manufacturing PMI
Below 50 signals contraction. Below 45 for 3+ consecutive months has preceded most recent recessions.
5. Credit Spreads (HY vs Treasury)
Widening high-yield spreads flag credit stress. Spreads above 700 basis points have historically marked or preceded recessions.
6. Initial Jobless Claims (4-week average)
Rising claims, especially above 350K–400K, signal labor-market cracking. Still below those thresholds in early 2026.
7. Housing Starts
Starts falling 25%+ year-over-year has preceded most recessions.
8. Retail Sales (real, year-over-year)
Negative real (inflation-adjusted) retail sales growth for 3+ months is a classic late-cycle signal.
9. Durable Goods Orders
Core capital goods orders declining for multiple months signals business investment pullback.
10. The Conference Board CEO Confidence Index
Below 45 has correlated with imminent cyclical downturns.
What No Single Indicator Tells You
- Timing: even the best indicators have 6–24 month lead times
- Severity: plenty of recessions are mild; others are brutal
- Sector-specific downturns: tech-led 2000 recession vs housing-led 2008 are very different
How to Combine Indicators
Professional investors build composite indexes. The New York Fed's recession probability model uses the 10Y–3M spread. The Atlanta Fed GDPNow gives real-time GDP estimates.
How to Act on Signals
Incremental risk management usually beats binary timing:
- Stagger sector rotation (cyclicals to defensives) over quarters
- Build cash gradually as more indicators flash
- Keep a "bear-market opportunity list" of quality names to buy at cheaper prices
Key Takeaways
- No single indicator is perfect; combine multiple
- Yield curve dis-inversion and Sahm rule are the highest-hit-rate signals
- Lead times are 6–24 months; recessions rarely start next week
- Act incrementally, not all-or-nothing
Track real-time recession-related coverage at [/topic/macro-economy](/topic/macro-economy).