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5 key recession indicators — yield curve, unemployment, credit spreads, Fed policy, and economic speech analysis
Before every major decline over the last three decades, the same pattern played out: New all-time highs → yield curve inverts then un-inverts → Fed starts cutting rates → market decline. Grey bands mark NBER-dated recessions.
The 10-Year minus 2-Year Treasury yield spread. When this goes negative (inverted), it has preceded every US recession since 1970, typically 6-24 months before. The un-inversion (steepening back to positive) is often when recession actually begins.
Triggers when the 3-month moving average of unemployment rises 0.50 percentage points above its low from the prior 12 months. Created by economist Claudia Sahm, it has identified every recession since 1970 in real-time with no false positives.
ICE BofA US High Yield Option-Adjusted Spread — measures the extra yield investors demand for risky corporate bonds vs Treasuries. Below 3% = risk-on complacency. Above 4.5% = credit stress. Above 6% = crisis-level spreads seen in recessions.
The Fed's benchmark interest rate. Aggressive rate cuts (>1% in a year) often signal the Fed is responding to recession risk. Rate hikes can slow the economy. Stable rates suggest the Fed sees no urgent risks.
Speech-based One-Stop-shop recession indicator. Uses natural language processing on Federal Reserve speeches to estimate recession probability. Below 0.10 = safe. Above 0.20 = warning. Above 0.50 = recession signal.
Weighted average of all 5 indicators. 0-14 = Low Risk (green). 15-34 = Elevated (yellow). 35-59 = Warning (orange). 60-100 = High Risk (red). This is a summary gauge, not a prediction — always review individual indicators for context.