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 53 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.

The US market’s expansion reached 24 months, with a cumulative return of 47.4% since it recovered from 2022’s fall.

Small caps also participated in the rally, signaling broader market strength. Attention has also shifted away from the largest technology stocks.

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 remind clients how to manage their portfolios during periods of economic uncertainty.

Our projections for the federal-funds rate are roughly in line with market expectations in 2026, although we expect more cuts than the market in 2027 and likewise a lower terminal rate.

This should help push longer-term interest rates down further. We expect the 10-year Treasury yield to drop to 3.25% by 2028.

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

The Federal Reserve’s rate-cutting dragged short-term rates lower over the three- and 12-month periods. However, persistent inflation fears, policy uncertainty, and resilient economic growth kept longer-term yields elevated.

A steeper curve means more opportunities for investors to capture yield in longer-dated bonds, but it also comes with more risks.

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. Despite tightening, credit spreads have remained positive and therefore are not indicative of a recession.

High-yield corporate credit and bank-loan spreads remained well below their 10-year historical median levels in 2025 after November’s marginal widening.

Source: Morningstar Indexes. Data as of Dec. 31, 2025. OAS (Option-Adjusted Spread) measures the additional yield investors require to compensate for the credit risk of holding a bond.

Source: Morningstar Indexes. Data as of Dec. 31, 2025. 

These historically tight levels suggest rich valuations and highlight the importance of security selection to manage risk amid market uncertainty.

While little of the tariffs were passed on to consumers in 2025, we expect that to change in 2026 with consumers feeling more of the impact.

Any waning of the artificial intelligence boom also poses a downside risk for near-term growth. But we expect growth to reaccelerate by 2028 and 2029 as monetary easing kicks in. Inflation should begin converging back to the Fed’s 2% target once the tariff shock fades.

Progress in bringing inflation down has stalled a bit for major economies. In the United States, housing inflation has been falling over the past year, while other categories have seen renewed acceleration.

We previously expected a gradual economic slowdown to help bring US inflation back down to 2% by the end of 2025. However, tariff hikes will likely delay a return to 2% inflation until 2027. 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.

Housing price growth has slowed again, dropping to 2.2% year over year as of third-quarter 2025.

This deceleration has spread across most regions. Home price growth remains comparatively weaker in Sunbelt markets where supply is abundant, as well as in ultra expensive West Coast markets.

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.