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Economic Research: U.S. Business Cycle Barometer: As Weakness Continues, Further Spread Would Mean Recession

Economic data continues to confirm what many already know: Economic conditions are worsening. Real U.S. GDP contracted at a revised 0.6% annual rate in the second quarter (was down 0.9%) after tumbling 1.6% in the first quarter. People associate two quarters of negative growth with recession for good reason, since that's been the case for all 12 recessions back to 1948. Past recessions also met the National Bureau of Economic Research's (NBER) criteria for depth, duration, and dispersion (see "U.S. Recession--Are We There Yet?," Aug. 2, 2022). But, in the current economic downturn, weakness is concentrated, with some sectors still showing strength, so, like the 1947 downturn, the dispersion criterion has not been met (see the appendix for the NBER's definition of recession).

While current conditions indicate a recession, as defined by the NBER, is not here yet, economic conditions suggest that the worst is not over. High prices and interest rates hurt affordability and slowed domestic activity through July, which will likely worsen into 2023. Our market data also weakened considerably through Aug. 30, with the 10-year/two-year and 10-year/one-year curves now inverted for two straight months. The Federal Reserve's interest rate is expected to continue to climb higher and faster than earlier thought. As the Fed front-runs monetary policy this year, with two 75 basis points (bps) hikes in June and July--the first time the Fed has raised rates this high since 1994--rates may now reach 3.50%-3.75% earlier than we thought. (We previously thought they'd reach that level by mid-2023.) Indeed, the Fed may go for a trifecta with its third 75-basis-point hike in September.

In our Business Cycle Barometer publication, we look for early signals of deceleration and recession. Our dashboard of leading indicators shows that U.S. economic momentum has continued to worsen. As such, whether the U.S. economy can avoid a recession feels like a toss-up. Our qualitative assessment of recession risk over the next 12 months is 45%, within a wider range of 40%-50%. We see risks closer to the top of that range heading into 2023 as cumulative rate hikes take hold. Our quantitative assessment of recession risk, based on a spread risks model, increased significantly in July, and climbed further in August across all spreads we track.

The odds of recession increased in August for all three traditional spreads (hitting the 30% threshold): 30% for the 10-year/three-month and 34% for both the 10-year/one-year and the 10-year/two-year. While the 10-year/three-month remains neutral as the indicator has not inverted for the month, it has worsened considerably, to 27 bps on average through Aug. 30 (was 67 bps in July) and 18 bps on Aug. 30. The 10-year/one-year and 10-year/two-year have inverted for two straight months, signaling recession for the U.S. going forward (see "Despite Rising Risks, Yield Curve Is Not Yet Signaling Recession," May 4, 2022, and yield curve predictability table in the appendix).

Worsening Near-Term Growth Prospects

Our dashboard of leading indicators through July signals that U.S. economic momentum has continued to slow significantly. In July, eight of the nine leading indicators we track sent negative (six) or neutral (two) signals on near-term economic growth prospects. (We tracked 10 leading indicators in June, with five negative and two neutral.) July data on the Freight Transportation Services Index, the 10th leading indicator we track, is pending at the time of this report.

Three weeks into August, of the seven indicators with available data, six are non-positive. A bright spot is the bounce in consumer sentiment from March/June levels to 58.2 (flashing neutral signal from negative). But overall, the picture is gloomy. By comparison, the most recent time it was worse was in May 2020 (see growth signals heatmap). (For details on what these signals mean, see the appendix.) With weakness in business performance, tightening financial conditions, persistent price pressures, affordability concerns, and the Fed's hawkish policy stance, recession is becoming increasingly likely over the next 12 months.


Falling energy prices have helped to lift consumer sentiment. Yet the entrenchment of high prices in other expenditure lines continues to hurt affordability. Single-family building permits, a leading indicator in our dashboard, fell to 0.9 million in July from its near-term peak of 1.2 million in February, while existing home sales fell by 5.9% month over month in July to a disappointing 4.81 million sales after falling 5.4% month over month in June.

Time To Worry? A Comparison With Past Business Cycles

Within one year before the last three recessions--in 2001, 2007, and 2020--the proportion of non-positive signals in our dashboard surpassed 60% (see chart 1). Having 90% of our tracked indicators currently flashing non-positive signals is an especially strong marker of recession risk for the U.S. economy over the next 12 months.

Chart 1


Yields and quantitative risk of recession

Monthly yield spreads (we use the term spread--the difference between 10-year and three-month Treasury yields--in our dashboard) slipped into neutral territory in July. The term spread for the 10-year/three-month declined to 0.67% in July from 1.65% in June. The near-term forward spread, closely monitored by the Fed, also worsened in July, to 0.88% from 1.93% in June (2.23% in May).

August averages through Aug. 30 for the 10-year/two-year and the 10-year/one-year remain in negative territory, at -0.35% and -0.38%, respectively, falling from -0.11% and -0.06% in July. Two consecutive months in negative territory for these two yield spreads now signals recession. The 10-year/three-month has narrowed even more, to 0.23% on Aug. 30, and the August average (through Aug. 30) is at 27 bps, from the 0.67% average in July 9. (Using St. Louis FRED data, the 10-year/three-month curve has a monthly average of 18 bps.) The near-term forward spread slipped to 0.62% on Aug. 26 from 0.88% in July.

Our quantitative assessment of recession risk, based on a spread risks model, increased significantly in July and August across all the spreads we track (see chart 2). At the end of July, the odds of recession in the next 12 months were 14% for the near-term forward spread, 22% for the 10-year/three-month, and 28% for both the 10-year/one-year and the 10-year/two-year. In August, the odds of recession increased in the three traditional spreads (hitting the 30% threshold): 30% for the 10-year/three-month and 34% for both the 10-year/one-year and the 10-year/two-year. While still relatively low, the odds of recession jumped by 100 bps in August to 15% for the near-term forward spread.

Chart 2


Credit spread, S&P 500, and consumer sentiment

After climbing 17.4% (from its mid-June low), to 4,305.2 on Aug. 16, S&P 500 index gains fizzled out after Fed members squashed market expectations on both inflation and the Fed's policy direction. The index fell through Aug. 30, leaving just a 8.7% gain from its mid-June low. Despite slight relief in prices, the Fed stressed that inflation remains hot, making it imperative for the Fed to remain hawkish and front-load rate hikes in 2022. On our dashboard, the S&P 500 remained in negative territory, with the near-term jump in stock prices most closely associated with a bear market bounce.

Moreover, the average monthly credit spread narrowed by 65 basis points compared with July (3.32%) but remained elevated relative to its 2019 average of 2.48%. The dashboard gave a neutral signal for a sixth consecutive month, suggesting weak financing conditions in the economy and moderate overall credit risk disparity between investment-grade and speculative-grade corporates.

The Consumer Sentiment Index for August jumped by 8 points from its all-time low of 50.2 in June and by 6.7 points from July to reach 58.2, with the dashboard indicator now flashing neutral, after three months in negative territory. The deceleration in inflation, helped by lower prices at the gas pump, provided tailwinds to overall consumer sentiment. Lower-income consumers--whose purchasing power was squeezed the most by inflation--registered larger gains on the index components than the higher-income consumers. Traditionally, high-income households' sentiment exceeds low-income households by 15 points. High-income households' sentiment, however, is still well below the pre-pandemic average.

Building permits and new orders index

Building permits for new single-family units fell to their lowest level in the last two years, flashing another negative signal for this indicator in our dashboard, for the third straight month. The Fed's hawkish stance has played a major role in cooling down the housing market as mortgage rates rise steadily. We think that the housing market indicator will remain negative on higher interest rates, with taming inflation the Fed's top priority.

The Institute for Supply Management (ISM) survey for manufacturing softened in July but remained above its 50-point neutral rate, indicating expansion for the 26th month. (The ISM services survey also remains above its 50-point mark.) However, the ISM manufacturing New Orders Index, a leading indicator of economic growth, deteriorated further in July, increasing worries of weakness ahead. The ISM PMI New Orders Index for manufacturers fell further into contraction territory, at 48 percentage points in August (its lowest rate since June 2020) from 49.2 percentage points in July. The index has been flashing a negative signal the last two months, indicating weakness on the horizon.

Credit availability indicators

Banks have tightened lending standards across all loan categories, as per the Senior Loan Officer Opinion Survey, likely owing to deteriorating market conditions. Loan suppliers believe that high inflation will lower borrowers' debt-servicing capacity, increasing their exposure to risk. Similarly, the Chicago Fed's National Financial Conditions Index (NFCI) signaled declining market liquidity--it narrowed by 8 bps in August over July but increased by 15 basis points since the first rate hike in March 2022. (An increasing value signifies tightened credit conditions.) The Fed's aggressive rate hikes over the last six months have limited credit availability, and the rise in the NFCI leverage subindex (has been in positive territory since June), which is tied to the cost of debt, has reinforced the notion.

Real-time economic conditions

The labor market held strong despite signs of weakness in the economy. Jobless claims adjusted for the labor force, which respond rapidly to changing business conditions, are still in positive territory as the jobs market remains tight, at least for now. But while nominal wages are strong, in real terms, wages have been in negative territory now for 16 straight months--since April 2021. The annual growth rate of the Freight Transportation Services Index, which is released with a lag, was also in positive territory through June.

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National Bureau of Economic Research definition of recession

When determining recession, the NBER's Business Cycle Dating Committee considers several monthly indicators--including employment, personal income, and industrial production--as well as quarterly GDP growth. The NBER's definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. It notes that in its interpretation of this definition, it treats the three criteria--depth, diffusion, and duration--as somewhat interchangeable. That is, while each criterion needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another. For more on this, please see

Historical yield curves

Table 1

Historical Yield Curves
Full history
Start date Number of recessions actually occurred Number of recession correctly predicted (T) Number of false positives Number of false positives longer than 1 month (F) Number of missed recessions (false negatives) Avg months b/w initial inversion and recession
T10-year/3-month 1982.1 4 4 0 0 0 12.25
T10-year/3-month bond equivalent 1953.4 10 8 2 1 2 11.63
T10-year/1-year 1953.4 10 10 2 1 0 13.60
T10-year/2-year 1976.6 6 5 2 0 1 15.60
Near-term forward 1961.1 8 7 5 4 1 13.14
Restricted history
Sample date Number of recessions actually occurred Number of recession correctly predicted (T) Number of false positives Number of false positives longer than 1 month (F) Number of missed recessions (false negatives) Avg months b/w initial inversion and recession
T10-year/3-month 1982.1 4 4 0 0 0 12.25
T10-year/3-month bond equivalent 1982.1 4 4 0 0 0 12.25
T10-year/1-year 1982.1 4 4 0 0 0 13.75
T10-year/2-year 1982.1 4 3 0 0 1 16.67
Near-term forward 1982.1 4 4 3 2 0 15.75
Note 1: Since the three-month constant maturity rate only dates back to 1982, we extend the series as follows: Use secondary market three-month rate instead and convert the three-month discount rate to a bond-equivalent basis ("-3Mo-Bond Equivalent"): bond-equivalent = 100*(365*discount/100)/(360-91*discount/100), where "discount" is the discount yield expressed in percentage points. Note 2: Number of recessions actually occurred within data history. If start date coincided with recession, recession not counted. Number of correct predictions (T)--True if inverts up to 18 months before recession, else missed recession (false negative). False positive (F)--Curve inverts earlier than 18 months before recession. Note 3: In the restricted history table, we compare the individual series dating back to 1982, in line with the earliest time the three-month constant maturity rate is available. Sources: St. Louis FRED and S&P Global Economics' calculations.
Definitions of positive/neutral/negative signals

Table 2

Growth Signal Decision Rules
Indicator Decision rule Sample
Term spread
Negative: less than 0 1/1/1978 – 8/1/2022
Neutral: 0 to 40th percentile
Positive: above 40th percentile
Credit spread
Recession in the past 12 months: 1/1/1997 – 8/1/2022
Negative: above 90th
Neutral: 75th to 90th
Positive: less than 75th
Recession NOT in the past 12 months:
Negative: above 75th
Neutral: 40th to 75th
Positive: less than 40th
S&P 500
Negative signal in the past 6 months: 1/1/1978 – 8/1/2022
Negative: below 10th
Neutral: above 10th
Negative signal NOT in the past 6 months:
Negative: below 10th
Neutral: 10th to 25th
Positive: above 25th
Consumer sentiment
Negative signal in the past 12 months: 12/1/1982 – 8/1/2022
Negative: below 10th
Neutral: above 10th
Negative signal NOT in the past 12 months:
Negative: below 10th
Neutral: 10th to 15th
Positive: above 15th
Jobless claims – adjusted by labor force
Negative: above 75th 1/1/1978 – 7/1/2022
Neutral: 50th to 75th
Positive: less than 50th
Freight transportation index – annual growth rate
Negative: below 10th 1/1/2000 – 6/1/2022
Neutral: 10th to 15th
Positive: above 15th
Building permits (single-family) – annual growth rate
Negative: below 25th 1/1/1978 – 7/1/2022
Neutral: 25th to 40th
Positive: above 40th
ISM (MFG) new orders index
Negative: below 50 1/1/1978 – 7/1/2022
Neutral: 50 to 52.9
Positive: above 52.9
National Financial Conditions Index
Negative: above 65th 12/1/1982 – 8/1/2022
Neutral: 40th to 65th
Positive: less than 40th
Fed’s loan survey
Recession in the past 12 months: 1996Q1 – 2022Q3
Negative: above 80th
Neutral: 25th to 80th
Positive: less than 25th
Recession NOT in the past 12 months:
Negative: above 50th
Neutral: 25th to 50th
Positive: less than 25th

The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

U.S. Chief Economist:Beth Ann Bovino, New York + 1 (212) 438 1652;
Contributor:Joseph Arthur
Research Contributor:Shruti Galwankar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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