Federal Reserve Study Claims These 5 Indicators Predict Recessions

When it comes to forecasting the economy, there are so many indicators we can look at. The list seems endless, whether that’s unemployment, exchange rates or even yield curves.

However, a recent study by Michael Kiley, an economist at the Federal Reserve, looked at the relationship between indicators and business cycles to see which ones were better across different time horizons. He came up with a list of five indicators that could be used to forecast recessions.

The Three Categories of Indicators

The study shows that indicators can be split into three broad categories:

Financial Indicators

The first category is financial indicators. This category would include the yield curve, equity prices, exchange rates, etc. Since these are based on the markets, they are forward-looking and set expectations about the future of economic activity.

An example given in the study says that central bank policymakers “adjust short-term interest rates with fluctuations in economic activity, and hence long-term bond yields — which embed expectations for short-term interest rates — incorporate…