There has been a growing discussion surrounding the possibility of a recession in the United States economy, as several indicators have been showing signs of trouble. An analysis shared on X by the investment research platform Game of Trade on June 1 delves into the details of these economic indicators that suggest a potential recession on the horizon. The analysis highlights the importance of housing market trends and unemployment rates in predicting economic downturns.
According to the analysis, housing is a critical leading indicator for recessions, with rising unemployment being a significant characteristic of economic downturns. The analysis acknowledges that historically, there is an average gap of about 5.5 years between recessions, which suggests that the next recession may not occur until 2026 if this pattern continues. However, the analysis also notes that economic cycles are not solely determined by average timing, as external shocks like oil crises, pandemics, and market crashes have historically triggered recessions, making them difficult to predict.
Nevertheless, a weakening housing market has consistently served as a reliable precursor to recessions. Data tracking two-year housing sales reveals that when housing markets start to decline, a recession often follows with a slight delay. The analysis by Game of Trade also highlights a strong correlation between housing market trends and unemployment rates. By shifting housing market data forward by 18 months, a nearly perfect correlation emerges with upcoming recessions and recoveries.
The platform explains that this correlation exists because housing is highly sensitive to interest rates. When the Federal Reserve raises rates, the housing market is the first to feel the impact, while the rest of the economy takes more time to experience the lagging effects of rising rates. Additionally, the analysis finds that the unemployment rate takes time to reach its lowest point during recessions and then starts to rise. The only exception to this pattern was in 2020 when the pandemic caused an immediate and massive economic shock.
Currently, the unemployment rate has been increasing since April 2023, marking about a year of continuous growth. Historical comparisons show that it took approximately one year of rising unemployment before the recessions in 2000 and 2006, and around 1.5 years in 1989.
Based on these observations, the assessment suggests that if the predictions of the housing market hold true, a recession could occur by late 2024. However, the historically low unemployment rate might delay its onset. Furthermore, the significant government spending in recent years could further postpone the next recession. Similar to the 1960s, when heavy spending delayed the recession until spending levels normalized, the current economic landscape may mirror this pattern.
