5 Red Flags To Watch For As Recession Anxiety Rises

A growing number of stock investors and CEOs are anticipating a recession in 2019 - a full year ahead of earlier forecasts - amid the impact of the U.S. government shutdown and the U.S.-China trade conflict. The S&P 500 index's worst year in a decade in 2018 amplified that pessimism, with more than half of the 134 CEOs surveyed at the recent Yale CEO summit forecasting a recession by year-end.

To spot a downturn early and prepare, Goldman Sachs says stock investors should look out for five key developments. Red flags include GDP growth falling below 1% or unemployment spiking, a sharp rise in balances in the private sector, investors' continued move towards cash, an ISM manufacturing index below 50, and flat industrial production, per Business Insider.

5 Big Recession Signals

  • GDP growth below 1%, or sharp rise in unemployment
  • Spike in private-sector financial balances
  • Continued rotation into cash
  • ISM manufacturing index below 50
  • Flat industrial production

Strategists at Goldman Sachs are among the more bullish market watchers, forecasting the US economy to continue to grow at an above-trend pace this year with no recession until 2020. They highlight positive drivers including high personal savings rates and strong real income growth.

Indicators to Watch

While the investment firm is optimistic in the near-term, Goldman offers a checklist of indicators for investors who want to monitor recession risks.

A sharp increase in the unemployment rate, now the lowest in years, or a deceleration in economic growth from its third quarter pace of 3.4% on an annualized basis, to below 1%, could spell bad news for the market, wrote Goldman. Analysts also found that in the months prior to the start of recessions, private sector financial balances tend to jump.  

Stock investors' sharp boost in cash holdings already is a major warning sign, per an earlier Investopedia story. Investors have upped their cash balances at the fastest pace since the 2008 financial crisis, a trend that is likely to continue as market upheavals continue. Cash and bond allocations typically rise continuously for 12-15 months ahead of a recession, per Goldman. The strategists note that cash was the best-performing asset class of 2018.

The ISM manufacturing index, which monitors employment, production, inventories, new orders and supplier deliveries, is another key signal if it falls below 50, can signal a major downturn, per Goldman. Right now, it's well above that.

Last, Goldman recommends watching for flat industrial production, which grew 0.6% in the most recent November reading.

Looking Ahead

Many market watchers, including analysts at Morgan Stanley, already say that stocks' sharp fourth-quarter drop already foreshadows a looming "earnings recession" that could also turn into an outright downturn. The big question remains how long the U.S. consumer, who accounts for two-thirds of economic activity, can continue to spend and keep the economy afloat. Ultimately, as investor sentiment declines amid forecasts of slowing economic growth and deteriorating corporate profits, the market may have to brace for a bumpy ride in 2019. 

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