A Recession is Coming

Read time: 5 ½ minutes

A recession is coming.

I know this with 100% certainty.

Now, on its own, this statement is meaningless.

Of course a recession is coming. There always will be another recession.

It might be tomorrow. It might be 10 years from now.

But the way our economic system is set up, recessions are a part of the normal cycles of the economy.

So knowing THAT a recession is coming is not unique. 

Knowing WHEN a recession will hit is.

And I’ll level with you right now. I don’t know for sure that a recession is just around the corner.

But I’m personally starting to see warning signs that are putting me on high alert.

In today’s issue:

• What the price of gum has to do with a recession

• How your company’s sales forecasts is a better recession indicator than stock prices

• The one indicator that’s predicted every recession since 1976

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What the price of gum has to do with a recession

Two weeks ago I was walking down the aisles of Target when I saw these red tags all over the gum section.

“New Lower Price”

I chew a lot of gum.

Like, a pack a day at my worst.

But these days it’s been more like 1-2 packs a month because of how high prices have surged the last few years.

So when I saw those lower prices I immediately did my happy stompy dance, squealed with delight like a 6-year old kid who just heard the ice cream truck, and loaded my arms with gum.

It was an incredible day (aside from the embarrassing lack of self control I displayed out in public for the whole world to see).

Except it also wasn’t. Because those little red tags told me a story about the economy that wasn’t as fun. 

Ever since Covid companies have been reacting to their own higher costs by raising prices.

As a consumer, this has been painful, but what could we do about it? 

Nothing.

So we paid the higher prices and just carried on.

But as their own costs of production slowed down, some companies kept increasing prices to see how much consumers would be willing to pay.

As a business, raising prices is the fastest way to increase your profits (as long as people keep buying).

So they continued pushing prices up. 

And consumers like you and me kept buying their stuff. So they kept pushing up pricing.

Well, those little red tags are a sign that Orbit pushed a little too far and people stopped buying as much gum.

That dropped their profits, and they now have to admit defeat and bring their prices back down to where people will buy their gum again.

How is that a recession indicator?

If consumers like you and me feel confident in our jobs and have lots of disposable income, we’ll keep buying the things we like even if the price goes up.

We might grumble about it a lot, but we’ll keep buying.

But when we start to feel a little more pinched every month, or when our job feels less secure, or when our savings have started to run out, we do the rational thing and start spending less.

And one of the first things we start to cut back on are luxury products, like gum.

So companies that sell these products are usually the first to notice a decline in sales when the average American is feeling a little cash strapped.

On its own it may mean nothing. Orbit may have just gotten a little too greedy.

But if you start to see this across the “nice to have but not essential” consumer good space, you have yourself a future recession indicator.

Lululemon warns of slowing North America sales as spending falters

Target issues weak forecast as shoppers pull back

Home Depot warns of sales, profit decline on weak consumer spending

Scary stuff.

Then you add to it…

Your company’s sales forecast is a better recession indicator than stock prices

CEOs are usually some of the first people to know if a recession is on its way.

That’s because they study their company’s sales data like 16 year old girls study a crush’s Instagram page.

So trust me, they know when their sales drop.

Sometimes this is because a competitor is kicking their butt. Other times, it comes out of the blue.

And when a sales slump is seemingly out of the blue, it’s a pretty good indicator that Americans overall are starting to spend less money.

And when Americans start to spend less money, a recession often follows.

If you run a business selling things, that’s not good.

So let’s pretend that you are a CEO and you notice sales starting to drop.

What would you do?

If you answered, “lower your expenses so you’re ready to weather the economic storm”, you’d be right.

Hiring freezes, capital investment projects postponed, and layoffs all are clues that your CEO is tightening the company’s belt for the future.

My company just instituted a hiring freeze and paused a lot of big projects.

That’s interesting.

So pay attention to what your CEO is saying in all those boring quarterly town hall meetings you have to attend. 

If you know how to listen, you can learn a lot about the economy.

It’s not a perfect prediction tool, but it’s one of the first indicators the average American can pick up on when a recession is on the way.

And the next indicator has an unbeaten track record.

The one indicator that’s predicted every recession since 1976

This one is a bit technical, so let me break it down step by step.

The US government spends more money than it takes in in taxes.

To fund this spending, they will borrow money from investors in the form of Treasury Bonds.

In a normal, healthy economy, the longer you agree to let the government keep the money you lend them, the higher the interest rate you’ll earn.

Lend your money for 3 months? You might make 2%.

Lend it for 20 years? Now you’ll earn 5%.

So a typical Yield Curve will follow a gradually rising slope like this:

But when investors around the world start to worry about a recession, a lot of them want a safe place to park their money for a long time.

So they start snatching up those long-term Treasury Bonds.

And when a lot of people do that, it pushes the interest rates (yield) earned from those bonds down.

When that happens, the curve flips upside down. Like this:

This is called a yield curve inversion.

Since 1976, this has happened six times.

And all six times, a recession followed an inverted yield curve within two years.

Well, I’ve got some news for you.

On April 1st 2022, the yield curve inverted.

That means, according to this prediction tool, we’re overdue for a recession.

Does that mean we’re about to have one next week?

No.

The yield curve, after all, doesn’t CAUSE recessions. It’s just an indicator that lots of investors are bracing for one.

But personally? I’m getting ready.

Time to go stockpile some gum.

Keep growing,

P.S. I’ll be launching referral bonuses for sharing this newsletter soon. The current perks you can earn that I’m fiddling around with are:

1. A guide on the top 10 indicators of a future recession

2. A 5-week investing 101 course (sent through weekly emails)

3. A free 30-minute coaching call with me where you can ask any questions you want.

Which of these gets you the most excited? And what else would you like me to create for you?

I’m here to serve you on our journey together of building wealth in light of eternity.

P.P.S. Here’s a cool table showing the last 7 Yield Curve Inversions and how long afterwards a recession happened.

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