The U.S. economy has been chugging along thus far in 2018. Although the stock market remains stagnant after a big 2017, jobs reports continue to show a stronger labor market overall.
Meanwhile, the American household debt set a record in the first quarter of 2018, reaching $13.21 trillion per the Federal Reserve Bank of New York. That’s a year-over-year increase of 3.9 percent, showing that debt is expanding faster than the economy.
With statistics like these, it has some people wondering: Are these signs that we’re heading toward another recession? And, how do you pay off debt or save in a recession?
Certain economic behaviors — such as slow job growth and increasing debt levels — can point to the possibility of a looming recession. And sometimes, there are signs that might suggest the country is already in an economic downturn.
Click through to find out what trends you should look for so you can prepare for the next recession.
More People Can’t Pay Their Loans
A rise in loan delinquencies can be linked to excessive credit growth and the buildup of household debt — which are both warning signs of a coming recession, said David Beckworth, a senior research fellow at the Mercatus Center at George Mason University. Although a large buildup of debt can be a warning sign, it’s important to remember that delinquencies can also rise as a result of a recession, said Beckworth.
These days, many people are falling behind on their auto loans, with Fitch Ratings finding that default rates on auto loans exceed the levels during the Great Recession and are at their highest level since 1996. What’s more, credit card default rates are climbing again after hitting a low in 2015.
Taxes Bring in Less Revenue
During an economic downturn, states typically see a decline in revenue, according to the Brookings Institution. In fact, during the fourth quarter of 2008 — during the Great Recession — state taxes began to fall, starting with sales taxes.
State sales tax can be especially indicative of consumer confidence. A common reason sales tax revenue can come up short before or during a recession is because Americans aren’t buying enough goods and services that the government can tax. And when consumer spending plunges, recessions usually follow.
Rapid Increases in Fraud Rates
Investor Michael Burry, made famous by “The Big Short,” noticed significant increases in mortgage fraud as the housing bubble grew toward its peak before collapsing and initiating the Great Recession.
“It is ludicrous to believe that asset bubbles can only be recognized in hindsight,” wrote Burry, according to “The Big Short: Inside the Doomsday Machine” by Michael Lewis. “There are specific identifiers that are entirely recognizable during the bubble’s inflation. One hallmark of mania is the rapid rise in the incidence and complexity of fraud …”
Increasing rates of fraud, scams and similar misconduct can serve as a warning sign of a recession — and they can even indicate we’re already in a recession. In May 2009, before the end of the Great Recession, TIME reported a rapid increase in reports of fraud.
Oil Price Shocks
Rising gas prices are always a headache to deal with. But they can often pose much greater dangers than just forcing you to pay more at the gas station.
Rapid increases in oil prices are often due to what is called supply shock — specifically, negative supply shock. In this scenario, the supply of oil suddenly seems to dry up, forcing prices to soar very quickly because the demand for it has not gone down. And when there’s an abrupt jump in oil prices, it tends to hurt consumer confidence.
Since 1973, recessions have often followed oil price increases, according to a report from the Federal Reserve Board.
Rising Interest Rates
You might already know how interest rates affect your finances, but you might be wondering how rising interest rates can be a recession warning sign — yet, also indicate growing economy. To understand this concept, you first have to know what the natural interest rate is.
“There is an idea in economics called the ‘natural interest rate,'” said Beckworth. “This is the underlying value interest rates would naturally take given the fundamentals of the economy. The Fed’s job is to try and align itself with this unobservable rate.”
And that’s the tricky part that can cause trouble for the economy. “What this means is that for interest rates to be raised too high and cause a recession, they have to be raised above the natural interest rate,” he said.
Decreasing Home Prices and Sales
When home prices and values start falling, many consumers respond by cutting spending because they believe their wealth has decreased. The cutting back can get more extreme if homeowners find themselves in negative equity — when they owe more on a home than what it’s worth. And, per usual, less consumer spending can lead to a recession.
The Great Recession is probably most identified with crashing home prices and values. Unfortunately for many homeowners, it seems that home values are still struggling to recover. A 2017 report by real estate website Trulia found that most home values in the U.S. have not recovered to their pre-recession peak.
Sales of Cardboard Boxes Fall
This might be an unusual warning sign, but it makes a lot of sense.
Many goods are shipped in cardboard boxes and containers. So, if sales of cardboard boxes soar, that means businesses are producing and shipping more products as well as employing workers, and times are good.
But if cardboard box production, sales and prices start falling, it often reflects a decline in spending on consumer goods. The fewer things getting bought, the fewer things getting shipped — hence, the reason why European cardboard box producer Smurfit Kappa Group PLC experienced revenue losses from 2007 to 2008.
Stock Market Crashes
Stock market crashes are probably the best-known warning signs of a looming recession. A stock market crash can cause a loss of consumer confidence, and thus a decrease in spending. But a loss of consumer confidence can also cause crashes and bear markets.
Stock market crashes and bear markets frequently precede recessions or occur concurrently. Some notable stock market crashes include the 1929 Wall Street Crash before the Great Depression and the 1973-74 stock market crash.
Unemployment Rates Drop Too Low
It might be indirect, but there’s an interesting link between declining unemployment rates and a possible recession.
“There is not a robust relationship here,” said Beckworth. “[But] if unemployment drops too low, the Fed gets worried inflation will take off. So, it increases interest rates. If it raises rates too far then yes — it can spark a recession.”
For this to occur, the unemployment rate must fall below the critical threshold of the non-accelerating inflation rate of unemployment. The threshold is very technical and defined by the Congressional Budget Office.
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Slowing or Declining Temporary Job Market
Temporary staffing companies tend to be the first businesses to witness growth after a downturn. Likewise, when the hiring of temporary employees slows or outright declines, it can be a warning signal of an economic downturn.
You could argue that a decline in temporary jobs could indicate a transition to full-time jobs. But take note that decreases in the employment of temporary workers are usually related to cost-cutting measures.
It’s important to note that predicting the next recession is not an exact science. One can argue that some signs are actually correlations. Still, knowing these potential recession indicators will only help you create a plan that will keep you afloat the next time the country experiences a downturn.
Click through to read more about 20 things to do in a falling stock market.
Joel Anderson contributed to the reporting for this article.
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