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June 2022 / VIDEO

Recession Signals Flashing Yellow

Global economies are weighed down by notable headwinds.

Key Insights

  • Some major indexes have approached bear market territory, and concerned investors are asking if the U.S. economy could be heading for a recession.
  • The global economy faces notable headwinds, and we believe that investors should adopt a defensive posture over the near term.

The persistent sell-off in global markets has many investors asking whether the U.S.—the world’s largest economy—could be heading for a recession. With some major indexes in or near bear market territory, this is a valid concern given that, historically, eight out of the nine S&P 500 bear markets since 1950 have been associated with a recession.

Although the global economy is on relatively solid footing to withstand slowing growth, it faces notable headwinds. On one hand, consumers and corporations have plenty of cash and limited debt levels (Figure 1), and the general slowdown started during a period of rapid economic growth.

Reason for Optimism, Strong Balance Sheets

(Fig. 1) Household and corporate wealth could help buffer slowing growth

Reason for Optimism, Strong Balance Sheets

March 1960 to December 2021.
Source: U.S. Bureau of Economic Analysis/Haver Analytics.
Household Cash Includes: Households/Nonprofit Institutional Service Households: Assets: Money Mkt. Fund Shares + Currency and Deposits End of Period (EOP), Not Seasonally Adjusted (NSA), in Billions of Dollars (Bil.$.).
Household Loan Includes: Households/Nonprofit Institutional Service Households: Liabilities: Loans, EOP, NSA, Bil.$.
Nonfinancial Business Cash Includes: Nonfinancial Corporate Business: Assets: Money Mkt. Fund Shares + Currency and Deposits EOP, NSA, Bil.$ + Nonfinancial Noncorporate Business: Assets: Money Mkt. Fund Shares + Currency and Deposits EOP, NSA, Bil.$.
Nonfinancial Business Debt Includes: Nonfinancial Noncorporate Business: Liabilities: Loans + Nonfinancial Corporate Business: Liabilities: Loans + Nonfinancial Corporate Business: Liabilities: Debt Securities.

On the other hand, global central banks—led by the U.S. Federal Reserve—are tightening monetary policies aggressively, while governments around the world are pulling back dramatically on fiscal stimulus measures. Further, the pandemic has negatively disrupted supply chains and labor markets, and Russia’s military aggression in Ukraine has damaged the global supply of energy, food products, and numerous industrial metals.

When gauging the probability of a recession, investors can assess various factors. For instance, the ISM Manufacturing Index is a barometer of economic activity that is published monthly by the Institute for Supply Management. A reading below 45 on this index typically implies that a recession could be imminent (Figure 2). Deteriorating solvency is another red flag—in particular, widening credit spreads and significant negative performance in the high yield bond sector could indicate rising market fears about an increase in bankruptcies. A persistent uptick in the unemployment rate over several months would also be a concerning data point.

ISM Manufacturing Index Is an Effective Gauge for Economic Growth

(Fig. 2) The index provides a timely barometer of economic activity

ISM Manufacturing Index Is an Effective Gauge for Economic Growth

January 1968 to April 2022.
Sources: Institute for Supply Management, National Bureau of Economic Research/Haver Analytics.

In our view, global markets are facing a challenging economic environment, and a recession in the U.S. could drive down financial markets even further. As a result, we believe that investors should adopt a defensive posture over the near term.

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass.

The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

It is not intended for distribution to retail investors in any jurisdiction.  

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