Market is Hot Now, But How to Tell When It Will Turn!

The job market is red hot now (especially for lawyers), but economists are keeping an eye out for the next recession (what goes up must come down!). It will be obvious for lawyers when the legal downturn will be — lawyers are laid off after business people. The lag is due to our being a service industry. Employers only get headcount for lawyers after a pent-up demand, so legal demand will exist all the way up to a business downturn.

This recent NYT article lists the following key recession indicators:

1. Rapid increases in the unemployment rate. Unemployment is a lagging indicator but is reliable because it always spikes in a recession. Unemployment is currently low.
2. Inverted yield curve. Look at Treasury bond interest rates to see how investors are feeling. When long term interest rates fall below short-term ones, the yield curve is inverted, reflecting low investor confidence. (Nervous investors are willing to accept lower rates for the safety of bonds.) The yield curve is historically one of the best predictors of recession. The NY Fed estimates a chance of recession next year at one in three.
3. Falling ISM manufacturing index. This index measures manufacturers’ purchasing activities. Above 50 means manufacturing is growing, below contracting. Right now we’re in the former category.
4. Low consumer sentiment. It’s a bad sign if it drops 15% or more. By the time spending slows, a recession is probably already happening. Currently “consumer confidence is basically flat compared to a year ago, but it has fallen since late last year.”
5. Other factors. They include temporary staffing levels, the quits rate (rate people voluntarily quit), building permits, auto sales…