11 Keys Signs the Economy Is Declining
Written by
Jordan Rosenfeld
Edited by
Amber Barkley
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When the economy is riding high, we often forget what it’s like to live through challenging economic times. The COVID-19 pandemic was the first major economic stumble since the recession of 2009, but the economy rebounded so well that it’s easy to forget what it’s like when things get shaky.
However, economic declines don’t tend to happen all at once — there are typically signs along the way that point to a coming shift. Here, financial experts explain some of the key signs that the economy is declining, though you shouldn’t panic if one or two of them are taking place.
Climbing Unemployment Rates
“Seeing an economic slump coming is a bit like reading tea leaves, but some classic signs don’t lie,” said Nathan Jacobs, senior researcher at The Money Mongers. Climbing unemployment rates are typically a solid hint that a decline is coming. People begin tightening their belts, he said. “Plus, when everyday people start doubting the economy and holding up their cash instead of spending, businesses take a direct hit.”
A Volatile Stock Market
Another indicator is when the stock market is “acting all kinds of moody,” Jacobs said. “If investors are jumping ship for safer options, it’s because they smell trouble.”
The problem is these jitters can spark actual problems, he said, “like actually kickstarting the economic backslide they’re afraid of. It’s a bit of a ‘which came first, the chicken or the egg’ scenario.”
However, he added that “a wobbly economy doesn’t mean we’re spiraling into a recession black hole. So many global shenanigans, like policy changes or out-of-left-field events, can nudge things back on track or off the rails. It’s never a clear cut path. So, even when it looks like we’re on a bumpy ride, remember: It’s not about destiny, it’s about the journey and how we react to it.”
Decreasing Consumer Confidence
The economy is shockingly sensitive to people’s opinions of it, according to Rory Donadio, CEO of Tribeca Capital Group, LLC. “When consumer confidence drops, people are less likely to make large purchases or invest in new opportunities. This can lead to a slowdown in economic activity,” he said.
Inverted Yield Curve
For people who invest in bonds, another indicator has to do with a term known as an inverted yield curve, Donadio said.
He explained, “Traditionally, long-term bonds yield higher returns than short-term ones. But when investors expect a recession, they might choose to invest in long-term bonds, causing their yield to drop below short-term bonds. This inversion can be indicative of an impending economic decline.”
Decrease in Gross Domestic Product (GDP)
A country’s GDP is the total value of all goods and services produced within the country in a certain period, Donadio said, thus, it’s not surprising that “a declining GDP can be a clear indication of a slowing economy.”
Increasing National Debt
Recently, Congress has had much discussion about national debt, which has been on the rise. That’s because, according to Donadio, “A significant increase in national debt could be a sign of a struggling economy. Although borrowing can stimulate economic growth, excessively high debt levels can raise concerns about the country’s ability to repay its loans, which can impact economic stability.”
However, it’s important to understand that “economic indicators are complex and interrelated. It’s crucial to take a holistic view of these indicators rather than focusing on one in isolation,” Donadio said. Try not to panic if you hear that one of these signs is taking place.
Slowdown in Manufacturing and Business Investment
A decline in manufacturing output and business investment can indicate a slowing economy, said Stephen Clark, a financial expert and founder of Finbri. “This can be caused by reduced demand for products and services, which can lead to layoffs and decreased consumer spending.”
Decrease in Housing Market Activity
As people who lived through the 2008-2009 housing bubble crash recall, the housing market is closely tied to the overall economy. Thus, a decline in home sales, construction and prices can be a warning sign of an economic downturn, Clark warned. “This is because a weakened housing market can lead to decreased consumer wealth and a decrease in consumer spending.”
Rising Consumer Debt
High levels of consumer debt can be a sign of a weakening economy, Clark pointed out. “This can occur when households are struggling to pay off loans and credit card debt, potentially leading to a decrease in consumer spending and a slowdown in economic growth.”
Freight Transportation Index
The Freight Transportation Services Index (TSI) is an often-overlooked economic indicator, according to Skyler Fernandes, founder and general partner of VU Venture Partners.
“When freight volumes decline, it can be an early sign of a slowdown in economic activity,” Fernandes said. The TSI encompasses various modes of transportation, including trucking, rail and air cargo. “Monitoring shifts in this index can provide insights into the movement of goods, which is a crucial component of a healthy economy.”
Money Velocity
If you want to think like an economist, you can concern yourself with money velocity, which measures the rate at which money circulates within an economy, Fernandes said. “When money velocity decreases significantly, it can signal economic stagnation.”
However, this indicator doesn’t just depend on the money supply but also on people’s willingness to spend. A rapid drop in money velocity can indicate that individuals and businesses are holding onto cash, which can have negative implications for the broader economy.
The overall lesson here is: Pay attention, but don’t panic.
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