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Recession watch: 3 signs of weakness, and 3 signs of strength

The post-pandemic economy just keeps defying predictions: consumers haven’t stopped spending; businesses haven’t stopped hiring; and the recession that’s been looming on the horizon since last year seems not to move any closer.

How can a recession be imminent yet distant at the same time? Unlike a weather event, it’s hard to tell, in the moment, when a recession has begun. Economists look at a broad array of data on consumers, businesses, and more to make this call. And currently, some of these factors are telling conflicting stories.

Let’s check in on 3 factors pointing to a slowdown, and 3 others pointing to signs of strength:

3 signs of weakness

1. Manufacturing has stalled

The manufacturing industry came roaring back after the initial shock of the pandemic. Today, it has gone into a slump, as a result of rising prices and rising interest rates. A drop in manufacturing often occurs before the start of a recession, because it is evidence that consumers are starting to spend less.

A key manufacturing index has slipped out of growth territory. Chart shows the level of the Purchasing Managers Index. A reading above 50 on the index generally indicates expansion, while a reading below 50 generally indicates contraction. Chart shows the index level recently fell below 50.

2. Credit is tighter

Banks are tightening their lending standards, making it harder (and more expensive) for both consumers and businesses to get loans. That trend, which is a normal part of a slowing economy, was exacerbated by the volatility in the banking sector earlier this year.

Banks are getting tougher on borrowers. Chart shows the share of banks that have been tightening lending standards for various types of loan, and shows a significant tightening in lending standards in recent months.

3. The yield curve is inverted

An inverted yield curve—which describes when long-term interest rates are lower than short-term interest rates—has been flashing a recession signal since last November. The yield curve can invert when short-term rates are high (often because the Federal Reserve is raising rates) but investors seek safety in long-term bonds, pushing their prices up and yields down.

Chart shows a normal yield curve, in which long-term yields are higher than short-term yields, versus an inverted yield curve, in which short-term yields are higher than long-term yields.
An inverted yield curve preceded the past 8 recessions by 4 to 21 months. Chart shows a measure of yield-curve slope, found by subtracting the yield on 3-month Treasurys from the Yield on 10-year Treasurys. Chart shows point at which the yield curve inverted (with a negative slope) before each of the past 8 recessions.
3 signs of strength

1. Consumers remain resilient

Consumers account for two-thirds of the US economy through their personal spending. Over the past 2 years, they have dealt with rising prices by scaling back their savings and spending what they saved during the pandemic. Still, they are ahead of where they were pre-pandemic. And that's not the only good news for consumers.

Household net worth is holding up. Chart shows household net worth, which is calculated as total assets minus total liabilities. Chart shows that household net worth has steadily increased over time, and dipped slightly in 2022 but has since started rising again.

2. The job market is strong

Workers still have a lot of power, though not quite as much as they did in 2022 when the "great resignation" was raging. The unemployment rate remains near a historic low. Jobs are still plentiful, though the number of openings has fallen slightly as businesses pare back on their hiring plans.

Unemployment is low while job openings remain high. One chart show that the unemployment rate is still near historic lows. Another chart shows the number of job openings in millions, which has declined slightly from a recent historic high, but still remains elevated.

3. Income growth is finally outpacing inflation

Consumers have seen brisk income growth since the pandemic, but until recently, all of it was erased by inflation, as prices grew more quickly than incomes. Now that inflation has slowed, consumers are finally getting ahead.

Income is finally growing faster than inflation. Chart shows 12-month percentage change in income, against 12-month percentage change in income after inflation. Chart shows that income after inflation had been falling until recently, and is now increasing on a year-over-year basis.

Adding it all up

If the scales are nearly balanced, where does that leave us?

Fidelity believes the economy is still in the late stage of the business cycle, when growth is slowing but still positive. Consumers remain resilient enough to make up for other areas of weakness.

However, it's important to say that no one rings a bell to signal the start of a recession. It's likely we won't even know we're in a recession until it's well underway—or already over.

It's also likely the next recession will be relatively short and mild, especially compared to the 2008 recession.

For investors, the important thing is to build a portfolio that can stand the test of time, including the inevitable, occasional recession. Then you can feel good about staying the course, even when the going temporarily gets rocky.

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Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

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