Piper Sandler Recession Indicator: What It Means for the US Economy

The Piper Sandler Recession Indicator is a tool used to predict potential economic downturns. It's based on the company's survey of 700 teenagers and their spending habits.

The indicator has a strong track record of predicting recessions, with an accuracy rate of 90%. This is because teenagers' spending habits are a good indicator of consumer confidence and overall economic health.

According to the indicator, a recession is likely when the percentage of teens planning to buy a car falls below 45%. This is because car buying is a significant expense that reflects a family's economic stability.

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The PIPER SANDLER RULE is a recession indicator that has accurately predicted downturns since the 1940s. According to macro economist Henrik Zeberg, this rule is currently signaling a recession.

The rule is based on a slowdown in the labor market and the pressure high interest payments exert on the real economy. This would put consumers in a difficult position.

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Companies' profits for the second half of this year may indicate that the economy is indeed likely to fall into a recession sometime next year. A slowdown in companies' profits is a key indicator of a recession.

The HOPE Cycle's roadmap suggests we're well into the slowdown, in the "Orders" phase. This phase tends to precede a more general slowdown in the economy by six to 12 months.

Here are some key recession indicators to watch:

These indicators suggest that we may be somewhere close to the middle of the second stage of the slowdown. If that's true, we likely have less than a year before the broader economy starts to slow down.

The economic impact of higher interest rates is a complex and multifaceted issue. The housing market is the first sector to react, and it tends to do so in a big way.

Higher interest rates translate to higher mortgage rates, which add to the cost of buying a home and reduce demand. The NAHB housing market index, which takes the pulse of the single-family housing market, peaked back in 2021 and recently fell for a sixth-straight month.

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The impact on the housing market is almost immediate, forcing would-be buyers out of the market and causing sellers to wait longer to find a buyer and may have to compromise on price. The rate on a US 30-year fixed mortgage loan just topped 6%, from 2.5% a few months ago.

Companies, on the other hand, are able to keep their profits up in the short term by cutting costs, passing other costs on to consumers, or delaying spending. But eventually, a slowdown in consumer spending and an increase in financing and production expenses will start to bite, causing companies' earnings to decline.

We haven't yet reached the stage when profits shrink, but the data suggests we're getting closer. Capital goods, industrial production, and average weekly overtime hours of production and nonsupervisory employees in the manufacturing sector are still expanding, albeit at a slower rate.

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The market reaction to a recession indicator can be a wild ride. The Piper Sandler Recession Indicator has been a reliable predictor of economic downturns, with 85% accuracy in predicting recessions.

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As the indicator rises, investors tend to become more cautious. This is evident in the stock market, where a recession indicator rise can lead to a decline in stock prices.

The indicator's accuracy is impressive, with only 15% of false signals. This means that when the indicator flashes red, it's a good idea to take a closer look at your investment portfolio.

Investors often wait for confirmation from other economic indicators before making a move. This can lead to a delayed reaction, but it's always better to err on the side of caution when it comes to your money.

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We're well into the slowdown, in the "Orders" phase, according to the HOPE Cycle's roadmap and data. This tends to precede a more general slowdown in the economy by six to 12 months.

The slowdown in growth might happen earlier than some economists expect, but it doesn't necessarily predict a recession. It's a roadmap, not an exact recipe.

Watch for signs of a slowdown in companies' profits for the second half of this year, as it may indicate that the framework is playing out. This could signal that the economy is likely to fall into a recession sometime next year.

A defensive stance is still warranted, at least until a slowdown in companies' profits becomes clearer in the data.

Additional reading: Piper Sandler Companies