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Recession: Different Indicators Used By Economists To Predict It

Recession: Different Indicators Used By Economists To Predict It

A recession is something that no country’s economy wants to deal with. And yet, it is unavoidable, being an integral part of a business cycle marked by growth and contraction.

Besides being inevitable, predicting this economic phenomenon is also quite challenging. Even though economists rely on a few warning signs called indicators to predict its arrival, those aren’t always reliable. The reason is that the prediction of business cycles is impossible. 

But undoubtedly, it does have a devastating impact on a country’s economy. You can see this helpful information to know a recession’s effects, including rising unemployment, falling retail prices, lower household incomes, and decreased production and manufacturing. 

Perhaps the most significant impact on the average person is the loss of jobs, reduced purchasing capacity, investment losses, and a lower standard of living. Employees who don’t lose jobs experience pay cuts. 

But how does it affect the art market? How long does it usually last? And what are some indicators that economists use to warn people about it? Get the answers below.

Some Indicators Used By Economists

Yield Curve

A yield curve shows the return investors can expect on debt instruments like bonds upon maturity. It also gives an idea about investors’ expectations on future interest rates, rate of economic growth, and inflation and is even helpful in understanding the direction taken by an economy. 

However, an inverted yield curve suggests the arrival of financial challenges in the future. Ideally, interest rates for long-term bonds should be higher than short ones. It happens when the long-term interest rate falls below the short-term rate, or investors accept lower curves for long-term than short-term bonds.

Wholesale And Retail Sales

Manufacturing indicators usually predict a change in economic activity through markers like factory orders and output, but retail indicators do so through buyers. 

A decrease in wholesale and retail sales brought on by decreased consumer demand because of inflation (which reduces consumers’ purchasing capacity) indicates a coming recession. 

Manufacturing Index

The ISM Manufacturing Index, calculated using data from a survey conducted by the Institute for Supply Management (ISM), is a reasonably reliable indicator to predict an economic slump. 

It is also known as the Purchasing Managers Index (PMI) and measures the changing demand for products, raw materials, and ordering activity in factories by surveying purchasing managers. A PMI above 50 indicates a growth in the manufacturing sector, while a score below 50 shows a decline. 

Unemployment Rate

Even though not a very reliable indicator, the unemployment rate points to problems with the economy, and a prolonged unemployment rate is a warning of an impending recession. 

Unemployment rises during a recession because of a decrease in overall economic activity and labor requirements. People who lose jobs during this time also find it difficult to reenter the labor market. 

How Long Does It Last?

An economic slump lasts for about 11 months on average. The longest one, The Great Recession, lasted 18 months, from 2007 to 2009. The shortest in history is the one brought about Covid-19 pandemic, with a duration of just two months. 

Is Art Investment A Good Option During A Recession?

Experts are not against buying assets during a recession, provided you know which ones you invest in. One of the safest options is to invest in artworks or the art market.

It is a safe alternative investment option because art prices remain stable, unlike other assets like bonds and stocks, as sellers prefer holding on to them rather than selling. 

One of the main benefits of the art market is its ability to self-regulate supply and demand without any outside interference. However, you must consult a professional art investment company before proceeding. 

A recession affects a country’s economy and impacts people’s everyday lives, which is why it’s important to know about it. Being familiar with its causes, indicators, and investment options during one is extremely helpful for planning for the future, for instance, through savings, managing debts, etc.