Can Recessions be Predicted?

Marco Terry
February 19, 2019
COMMERCIAL, RETAIL, FABRICATION : FORECASTS

The short answer is no, a recession can't be predicted reliably. There is not enough historical data to have a reliable set of indicators and methods—especially since our economy is always changing and recessions can come from different sectors.

If recessions could be accurately predicted, we could enact measures to avoid them. Yet, we don’t seem to avoid recessions at all. They hit us at regular intervals. Furthermore, consider the last recession. Some experts missed it, and even those who saw it coming thought it would be mild with a quick recovery. Only a few experts forecasted the severity of what followed.

As a business owner, how do you know which expert is right? More importantly, how do you develop a sensible business strategy considering this uncertainty?

First, look at the broad economy

One reasonable approach is to review the broad economy by looking at the Conference Board’s Leading Economic Index. The LEI assesses a composite of multiple indicators that historically have shown a downward or upward movement in the economy.

As a non-expert in economics, I rely on this aggregate indicator for a general idea of how the U.S. economy is doing in the near term. Here is their conclusion:

“The LEI increased slightly in November, but its overall pace of improvement has slowed in the last two months,” said Ataman Ozyildirim, Director of Economic Research at The Conference Board. “Despite the recent volatility in stock prices, the strengths among the leading indicators have been widespread. Solid GDP growth at about 2.8 percent should continue in early 2019, but the LEI suggests the economy is likely to moderate further in the second half of 2019.”  (Source: www.conference-board.org)

Second, consider the LEI a short-term forecast only

I consider this indicator to be a good short-term forecast. So far, things appear to be reasonably good for in the near future.

However, the publishers of this indicator forecast that the economy will likely “moderate further” (slow down) later this year. We should take this statement as a warning.

I understand that it’s impossible to tell what will happen in the long term. The economy could slow down, enter a recession, or improve. However, chances are good that things will slow down. That is enough to warrant concern.

I believe it is wise to prepare for a possible slowdown. And the best time to prepare is now, when things are going well, and you have time and resources to move in deliberate and calculated ways.

Marco Terry is managing director of Commercial Capital LLC, comcapfactoring.com, a factoring company and leading provider of invoice financing to companies in the glass industry. He can be reached at 877/300-3258.