The Advisor’s Cheat Sheet to Recession Indicators

Economists often use imperfect historical information to form opinions about the economy’s direction. We often don’t know we’re in a recession until it’s well underway—typically, the National Bureau of Economic Research adjusts a recession’s start date after the fact. 

However, that doesn’t mean recessions have to catch advisors and clients by surprise. By monitoring potential signs of a recession, advisors can understand the direction of the economy and chart an appropriate course for their clients. 

Here’s what Morningstar evaluates and where indicators stand. To get 40 pages’ worth of charts and graphs showing key market trends, download the full Markets Observer report.

Here are a few signals that economists track to understand economic activity.

• Interest rates: This can indicate a recession in multiple ways. If interest rates rise too quickly or remain high for too long, it can slow economic growth and potentially lead to a recession. On the other hand, if the Federal Reserve begins cutting rates, it can be seen as an attempt to stimulate the economy in response to recessionary pressures.

• Inverted yield curve: This refers to when short-term bond yields climb above longer-term ones. This indicates an expectation of lower interest rates, and thus lower growth and inflation, down the road. Inverted yield curves have also historically occurred ahead of a recession.

• Credit spreads: These show the yield difference between two fixed-income investments with the same maturity but different credit qualities. In the past, negative credit spreads have predicted recessions, but they can’t pinpoint the exact start date, severity, or duration.

• Decrease in real GDP: Consumers tend to tighten their belts in response to economic uncertainty. That could lead to lower economic output, layoffs, and economic contraction. 

• High inflation: This can reduce consumer spending power. As previously noted, the Federal Reserve may raise rates to combat inflation. However, if the rates are raised too aggressively, it could signal a recession, as consumers look to rein in spending amid higher prices.

• New housing starts and home prices: In a recession, home sales often decrease, which can lead to a decline in housing prices. But a recession isn’t the sole cause.

Stocks remain in an expansion phase despite the broad pullback in March, bringing this current expansion to 27 months.

US large-cap stocks have risen 28.9% annualized since 2022’s downturn. More recently, small caps outperformed large caps in the first quarter of 2026, as artificial intelligence and geopolitical uncertainty weighed on some of the market’s largest companies.

The chart below compares the downturns, recoveries, and expansions with recessions, the latter based on National Bureau of Economic Research data.

Use these resources to help clients manage their anxiety during periods of economic uncertainty.

In the near term, the Fed is likely to wait for the inflationary impact of the oil surge to fade before enacting further rate cuts.

We think the Fed will keep rates unchanged in 2026, before delivering a cumulative 1.25 percentage points in cuts over 2027-28, more than market expectations. This should help push longer-term interest rates down further, with the 10-year Treasury yield dropping to 3.25% by 2029.

Lower rates will be needed to support continued healthy economic growth.

Interest rates affect the yields on certificates of deposit, high-yield savings accounts, and money market accounts. Despite a possible pause, the Fed has indicated they will continue to cut rates in the future, and advisors should prepare clients for how this may affect their portfolios.

The yield curve is not inverted, which does not signal a pending recession.

After inching lower through January and February, thanks to softer economic data and expectations of Federal Reserve rate cuts, yields reversed course in March. The Feb. 28 start of the Iran war drove yields higher across the curve as markets priced in higher inflation owing to higher energy prices.

Five-, 10-, and 30-year bond yields rose to 3.92%, 4.30%, and 4.88%, respectively.

An upward-sloping yield curve suggests investors can capture higher income by extending duration, but doing so increases sensitivity to interest rate changes. The current yield curve may present income opportunities for investors, so advisors should evaluate current fixed-income allocations for a balance of yield and interest-rate risk.

Corporate credit spreads can indicate the broader economy’s health and investor confidence in credit markets. Recent widening in credit spreads suggests rising investor caution and higher compensation for risk.

High-yield corporate credit and bank-loan spreads widened in March. While high-yield corporate credit spreads remained well below their historical median levels, leveraged-loan spreads touched 10-year historical 75th-percentile range. Within the bank-loan sector, spreads for software loans widened by 263 basis points since the start of 2026, with worries around AI.

However, levels remain below historical peaks, indicating markets are not signaling severe stress. While spreads have moved wider, they remain far from levels typically associated with recessionary conditions.

The oil price shock, along with lingering tariff impact, will push up inflation significantly in 2026 and weigh on gross domestic product growth.

Any waning of the artificial intelligence boom also poses a downside risk for near-term growth. But we expect growth to reaccelerate over 2028-2030 as monetary easing kicks in. Inflation should begin converging back to the Fed’s 2% target once the tariff shock fades.

Before the oil price shock, the Euro area and Japan had been closing in on their target inflation of 2%, while the US and UK remained somewhat above.

In the US in particular, core inflation trended upward over 2025 and to start 2026, with accelerating core goods inflation more than offsetting the impact of falling housing inflation. Higher core goods inflation has been principally due to tariffs.

We anticipate inflation remaining high, which can be indicative of a potential recession.

Advisors can use these resources to help navigate client questions about inflation and ease concerns.

Home price growth has continued to decelerate, dropping to 1.8% year over year as of the fourth quarter of 2025, down from 5.4% average growth in 2024. The deceleration in home price growth has been broad, while Midwestern markets were more resilient.

This deceleration has spread across most regions. Sunbelt markets continue to see weak or negative growth owing to vigorous building in response to the post pandemic runup in prices.

Other economic uncertainties aside, some investors may be on the hunt for a new home. Here’s how to make that purchase work in today’s market.

Diversified portfolios should help clients reach their long-term goals and withstand downturns in the meantime. That perspective isn’t always reassuring for clients worried about a recession.

Our behavioral finance researchers created a checklist for guiding clients through a recession.

• Be the go-to source for advice. Create content to answer common client questions in simple terms. Then share through meetings, emails, and social media.
• Gauge client expectations. Remind overly optimistic clients that market downturns are inevitable and unrealistic expectations could lead to panic. Remind pessimistic clients about the value of staying the course.
• Create concrete action plans. Ask clients to identify triggers that might cause them to tinker with portfolios. Ask them to create an “If, then” list to identify what to do if those triggers happen, then sign it to commit to the plan.