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The odds of a 2022 Recession have skyrocketed over the last several weeks. Multiple forward-looking indicators that historically predict recessions are now blinking red. And these indicators, which I will reveal in this post, are screaming that there could be a 90% Chance of Recession in 2022.
Picking the Right Recession Indicators
I can already see yourself thinking “How could there be a Recession in 2022? The economic numbers look so strong on the surface.” And no doubt, the traditional economic indicators look very strong. The headline unemployment rate in America is at a near record-low of 3.8%. Employers added over 600,000 jobs to their payrolls in February 2022. Home Prices are the highest they’ve ever been. These figures scream NO RECESSION.
But there’s a problem with these traditional metrics of economic health: they are active / present day indicators. They are the result of the inner workings of the economy, not the cause. And that means they will be the last figures to change once a recession is underway.
Forward-looking observes should largely ignore these traditional measures of economic activity. And instead focus on the three indicators I will reveal in this post as a more meaningful predictor of America’s Economic future.
Each of these indicators are now saying: Recession in 2022.
Record-Setting Oil and Gas Prices
Have you been to the gas pump lately? If so, you’ve probably a noticed a historic surge in the cost of gasoline. According to AAA, the current gallon of gas in America averages over $4.00/Gallon. That’s up over 50% from its level one year ago and 75% from two years ago.
Higher gas prices are a nuisance to you as a consumer. But they also are a warning sign of economic trouble. The last time gas prices were this high was July 2008, a mere two months before the world imploded in the most devastating financial collapse since the Great Depression.
The fact that gas prices are getting so high again, especially in a short period of time, dramatically increases the likelihood of a recession. That’s because spiking gas prices are a tax on the American consumer that has a tendency to reduce spending in the economy. Moreover, the lower profit margins that come from higher gas / oil costs will cause many businesses to reduce investment.
But this isn’t just theory. The last 50 Years of US Recessions proves the point. Any time there’s been a major recession since the mid-1970s, it was led by a big spike in the price of gasoline.
Notice how the yellow bars – periods of recession – were all preceded by big spikes in the red line, a surge in gas prices over two years. Today the US is up to +77% over the last two years. Historically, nearly every time that level is reached a recession soon follows.
Skyrocketing Oil and Gas Prices are the first WARNING signal that future economic trouble in America awaits.
Watch this VIDEO I put together to learn more about why skyrocketing oil and gas prices historically have caused Economic Downturns and Recessions.
The Yield Curve is about to INVERT
But gas and oil prices are where it starts. There are other indicators flashing RECESSION in 2022. The most notable of these is the Yield Spread.
When the Yield Spread flattens significantly, and even inverts (aka, short-term bonds yield more than long-term bonds), a recession soon follows. Don’t believe me? Check out this data from the Federal Reserve Bank of St. Louis.
This chart tracks the difference between the 10-Year US Treasury Yield and the 2-Year Treasury Yield (“Yield Spread”). Generally speaking, the Yield Spread should be higher on longer-dated bonds. That’s because you as the bond holder take more inflation risk by locking up your money for 10 Years instead of 2. This higher inflation risk means that, in normal times, you would receive a higher yield (think of this as higher “return” or “interest rate”) on the long bond.
And we can see in most periods the 10-Year Yield is higher (firmly above the black line). This positive Yield Spread is the sign of a good economic outlook, because financial markets are predicting that economic activity and inflation will increase over the long-term.
But there are also instances when the Yield Spread goes flat or negative. Meaning that your Yield / Interest Rate on a 2-Year Bond would be equal or higher than the 10-Year. Every time the Yield Spread has flattened or inverted in recent US History, a recession has soon followed.
WHY? Because the 2-Year Yield increasing while the 10-Year Yield goes flat or negative signifies FEAR about the economic future. It means that bond holders are buying long-dated US Treasuries while selling short-dated ones. An indication they want the security of a long-term government bond while also increasing their cash reserves by selling short-term bonds.
And in March 2022 we’re heading into another Yield Spread Flattening / Inversion Situation. The current Yield Spread is only +0.24%, and will likely go down further once Jerome Powell and the Federal Reserve start increasing interest rates.
The flattening Yield Spread is yet another warning of recession.
Crashing Consumer Sentiment across America
Not only do surging Gas Prices and a flattening Yield Spread indicate that a Recession could be coming in 2022. So does a third indicator which tracks the sentiment of American Consumers.
The University of Michigan Consumer Sentiment Survey has been tracking how Americans feel about the economy since the early 1950s. Each month over the last 70+ Years the survey has asked a sample of 500 Americans Questions like:
“Would you say that you (and your family…) are better off or worse off financially than you were a year ago?”
“Now turning to business conditions in the country as a whole — Do you think that during the next 12 months we’ll have good times financially or bad times…?”
The answers to these questions are then categorized into an Index that tracks the Overall Sentiment of American Consumers. And unfortunately for the 2022 Economy, this Sentiment Index is at its lowest levels in a decade.
Consumer Sentiment in February 2022 logged an Index Level of 62.8, the lowest reading since 2011. According to Dr. Richard Curtin, the University of Michigan Professor who runs the survey, Consumer Sentiment has plummeted due to:
- Inflationary declines in personal finances
- Universal awareness of rising interest rates
- Falling confidence in the government’s economic policies
- The most negative long-term prospects for the economy in the past decade
Over the last 50 Years, any the time the Index has been consistently below 70, there has been a Recession in the near future or one was already underway. That is a grim sign for the future of the US Economy.
Concluding Thoughts on 2022 Recession Possibility
I did not write this post to scare or fear monger. But to merely highlight that three indicators with a very strong history of predicting Recessions are each blinking red right now in Spring 2022. To summarize:
- Higher Oil and Gas prices will likely erode consumer spending and business investment, putting a drag on economic growth.
- A flattening Yield Spread is a signal that financial and bond markets believe the long-term economic outlook is souring. The more money that goes to long-term government treasuries, the less that gets used to invest and spend in the economy.
- Crashing Consumer Sentiment is a sign that regular Americans are losing confidence in the future of the economy and have eroding personal finances.
I believe that a Recession occurring at at some point in 2022 is very likely. If it doesn’t occur in 2022, perhaps it will be early to mid-2023. Predicting the exact timing can be difficult.
Of course, there is no guarantee that a Recession will occur. And these forward-looking metrics of economic health could potentially reverse course in the coming year. As a result, it will be important for you to track them going forward. Check out the sources below.
Also make sure to subscribe to the Reventure Consulting YouTube Channel to keep up with the data!
-The Federal Reserve Bank of St. Louis tracks the Yield Spread between the 10-Year and 2-Year Treasuries.
-Consumer Sentiment Data is updated monthly from the University of Michigan Survey of Consumers.