Decoding Economic Indicators: Predicting Recessions in 2023 and Beyond

Understanding the predictors of recessions is crucial for economic planning and stability. This article delves into key economic indicators that signal potential recessions, contextualized with the latest data from 2023.

Analysis of Financial Condition Indices

St. Louis Fed Financial Stress Index (STLFSI)

• How It Works: The STLFSI is composed of 18 weekly data series, including seven interest rate series, six yield spreads, and five other indicators. Each component captures a unique aspect of financial stress.
• Interpreting the Index Value: The index’s average value since its inception in late 1993 is designed to be zero, which represents normal financial market conditions. Values below zero indicate below-average financial stress, suggesting a stable or growing economy. Conversely, values above zero imply above-average financial stress, often a warning sign of economic trouble.
• Contextualized Data (November 2023): With a reported value of -0.6715​ the STLFSI in November 2023 indicates lower than average financial stress in the market, signaling a stable financial environment.

Chicago Fed National Financial Conditions Index (NFCI)

• How It Works: The NFCI integrates 105 different financial indicators, classified into risk, credit, and leverage categories. It measures the financial conditions of money markets, debt and equity markets, and the banking systems.
• Understanding Index Values: Like the STLFSI, the NFCI is constructed to have an average value of zero (with a standard deviation of one) over a sample period extending back to 1971. A negative value implies looser-than-average financial conditions, while a positive value indicates tighter-than-average conditions.
• Contextualized Data (November 2023): In November 2023, the NFCI value of -0.46755​ suggests relatively loose financial conditions, indicative of a supportive environment for economic growth and stability.

Consumer Confidence and Spending: Reflecting Economic Sentiments

• Consumer Confidence Index: This index reflects consumers’ perceptions of the current economic situation and their expectations for the next six months. Higher values generally indicate a positive outlook on the economy, leading to increased spending and investment. Rising to 102.0 in November 2023​ this index gauges consumer sentiment and future economic expectations. A higher index value typically indicates consumer optimism and a propensity to spend, bolstering economic growth.
• Consumer Spending Trends: Consumer spending, supported by a resilient labor market​​, is a vital contributor to GDP. In 2023, increased online consumer spending suggests robust economic activity. While not a direct predictor of economic recessions, shifts in consumer confidence can presage changes in spending behavior, which is a significant component of GDP.

Fed Economic Risk Models

Recession Predictions and Yield Curves

The Yield Curve, particularly the 10yr-3M and 10yr-2Y curves, are crucial indicators of recession risks. The New York Fed’s Recession Risk Model shows a low probability of an imminent recession.

Economic Tracking with the BaR Economic Grid

The BaR economic grid by David Rice tracks 18 economic indicators, showing that while growth is slowing, a recession is not immediately imminent.

Labor Market Dynamics: Indicators of Economic Vitality

• Jobless Claims: These are a measure of the number of people filing for unemployment benefits. A rising trend in jobless claims can indicate layoffs and a weakening labor market, often preceding economic downturns. Lower jobless claims, as seen in November 2023 with 209,000 claims​ signify a strong labor market.
• Unemployment Rates: Persistent high unemployment rates are commonly associated with recessions, as they reflect a significant slowdown in economic activity.

Gross Domestic Product (GDP): The Broadest Economic Measure

• GDP Growth Rate: GDP is the sum of all goods and services produced within a country’s borders. It is the broadest measure of economic activity, and consistent negative growth (over two consecutive quarters) is a technical indicator of a recession. The U.S. economy’s 5.2% growth in the third quarter of 2023​ highlights economic expansion.

Conclusion: 

As of late 2023, the U.S. economy demonstrates resilience with stable financial conditions, strong consumer confidence, and robust labor market performance. Despite some signs of cooling, the overall economic indicators do not suggest an imminent recession. However, continuous monitoring of these indicators is essential for early detection of potential recessions. Understanding these fundamentals helps in navigating economic cycles and making informed decisions.