Two Signs Point to a US Recession: What It Means for Markets

There are two giant signs at this point that truly indicate the US is either tiptoeing into or spiraling into recession. The word "recession" might sound scary though.

First of all, what is a recession? 

Recession is basically when the economy goes through a little rough patch. Things slow down, and people lose their jobs. The businesses may struggle. Not fun at all but perfectly normal when taken as a part of how economies work.

What are these two signs?

It's called Claudia Sahm Rule—after Claudia Sahm, a smart economist who used to work at the Federal Reserve. Her rule says that usually when the unemployment rate goes up by a certain amount, it means a recession is on its way.

The US job figures were not that great last time. There were more people out of work than we have seen in a while. This has inspired the Sahm Rule and got a lot of people a little scared.

But wait–even Claudia Sahm doesn't think we should freak out about this right now. The job market has been pretty funky since COVID, so this rule might not be what it usually is.

The Yield Curve

Basically, a yield curve indicates how much the government incurs as payment of interest when it's borrowing money. You would charge more interest from someone whom you had lent money for a longer time.

Well, that's the other way 'round right now in the US—short-run loans are paying more than long-run ones. That's known as an "inverted yield curve," which generally happens before a recession starts. But hang on—it's a bit different this time! Now, some of these selfsame experts are saying that it's not the inversion that counts but when things return to normal. And that could happen pretty soon. 

Implications of This for Us

You might be thinking at this point, "Well, I don't live in the US, so why should I care?" 

Actually, it is because nowadays the economy of the US is huge, and if it sneezes, the rest of the world could catch a cold. That is, if the US goes to the tank or has any problems, most likely that will now reverberate to stock markets and business around the world.

Now, here's the thing: don't freak out! The above is indicative, not predictive. The economy is a complex beast, and there is nobody who can ever foresee the future perfectly.

If you are investing, well, ups and downs are just normal. In most cases, it is best to go with the long term and not make sudden moves on immediate-term market news.

Anyway, the thing is—no matter how bad things seem to get along, in the end, an economy bounces back. That is part of the cycle.

So keep an eye on one's news, but one does not have to let it get to the point of overstressing. Be informed, be calm, and if it really is worrisome, set up a visit with a financial advisor who can help you make smart choices for your situation.