One Real-Time Indicator Signals a Recession Is Looming

This essay was originally published in DailyWealth Trader, a daily trading advisory, and has been adapted. To learn more about this service, click here.

We've avoided a recession so far...

In 2022, the majority of folks were expecting a recession. I was in that camp, too. Some signals that typically point to a slowdown had started to appear.

But when a recession didn't come, the S&P 500 Index took off in the first half of 2023. And that rally happened despite the most aggressive Federal Reserve rate-hiking campaign in more than four decades.

We're not out of the woods yet, though. Now, another warning sign is pointing to trouble on the horizon...

It doesn't guarantee that a recession is imminent. But it's one reason that we know economic trouble is looming...

The indicator we're looking at today is boots-on-the-ground data from the transportation sector.

It's the total employment figure for workers in truck transportation. And it's tied directly to the real-time economy...

The trucking segment moves more than 72% of all freight in the U.S. transportation industry. As such, employment in trucking grows steadily when the economy is humming along. But it takes a hit when the economy starts to slow down.

In fact, the few instances when our trucking industry loses jobs almost always happen just as we're falling into a recession. Less business activity means truckers lose work, because they're carrying fewer shipments.

That makes the truck-transportation employment figure one of the most accurate, real-time indicators of a looming recession.

Now, let's look at how this indicator has performed since 1990. Take a look at the chart below...

As you can see, total employment for the group has turned downward prior to each of the past four recessions (the gray bars). And sustained periods of job losses are otherwise rare.

Aside from a pullback in 2016, every significant drop since 1990 has happened just months before the start of a recession.

In 2001, this indicator peaked right before the recession got underway. And it had been stalling for months.

The 2007 to 2008 recession had a little more warning. The employment number turned lower 10 months before the start of that recession. It dropped 2.4% in that span, then plummeted during the recession.

Similarly, this indicator peaked nine months ago. As of August, which is the latest data from the U.S. Bureau of Labor Statistics, it had fallen 2.7% from its January peak.

This is a new signal telling us that a recession is increasingly likely.

Now, it could be a false signal. Or it could mean the other signals that were pointing to a recession months ago – like surging interest prices and banks tightening their lending standards – were early.

We can't know for sure. But what we can do is focus on how we approach the market.

That means maintaining discipline in your investments. Namely, make sure you use stop losses on your positions... and honor those stops when prices move against you.

It's a critical step to cutting your losers and letting your winners ride. If you do that, then recession or not, you'll be better positioned for success.

Good investing,

Chris Igou

Further Reading

Many investors worry about one classic recession signal: the inverted yield curve. This measure is stuck in a record streak of negative readings – yet a recession still hasn't arrived. That's why it's important to keep an eye on more than one indicator as we watch for trouble ahead... Read more here.

Right now, banks are getting much more strategic about lending. They're tightening standards dramatically. That's usually another sign that we're getting closer to a recession – and certain companies will be especially vulnerable... Learn more here.