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 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. 

• The inverted yield curve 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 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 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.

US stocks posted strong gains in 2025’s third quarter, led by continued momentum for most of the Magnificent Seven—Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.  

This pushed cumulative US market returns past 40% since the most recent market bottom. Small caps also participated in the rally, signaling broader market strength. This expansion remains resilient 36 months on from the last broad contraction. 

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.  

There’s been indication that the Fed will continue to cut rates, and advisors should prepare clients for how this may affect their portfolios and risk profiles. 

After the US Treasury yield curve steepened in the first half of 2025, yields moved lower in the third quarter. The Federal Reserve’s September rate cut pulled short-term rates down, while softer labor market data contributed to declines across maturities. Still, elevated long-term yields suggest investors continue to demand greater compensation for holding longer-duration debt—a reflection of a higher term premium.

The current yield curve may present income opportunities for investors, so advisors should work with clients to make informed decisions about any fixed-income investments. 

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. 

Corporate credit spreads, an indicator of the broader economy’s health and investors’ confidence in credit markets, tightened through the third quarter of 2025 after a brief widening earlier in the year. Spreads remained at historical tight levels at the end of the quarter, signaling rich valuations. Against a backdrop of market uncertainty, this limits the sector’s appeal for investors seeking more favorable risk-adjusted returns. 

These historically tight levels suggest rich valuations that advisors may want to discuss with clients, as it may affect returns and portfolio positions. 

While little of the tariffs have been passed on to consumers yet, we expect that to change over the next year. We expect US GDP growth to trough in 2026, owing to the impact of tariffs, along with a separate downward impulse to consumption growth from more-cautious households.  

As the plans for tariffs continue to evolve, advisors should be prepared to speak about that volatility with clients. 

The tariff volatility has also contributed to our inflation forecast. We believe inflation will peak in 2026, but then drop off as the slack created by weak GDP growth generates disinflationary pressure. 

Progress in bringing inflation down has stalled a bit for major economies. For the US, 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 for several years. 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. 

After a dip in 2022, housing price growth has been strong since mid-2023, and it stands at 4% year over year as of 2025’s first quarter. This level of activity is typically not seen ahead of a recession.  

Geographically, the gains are fairly broad-based. Price growth has been weaker in Texas markets, where supply is beginning to overtake demand, thanks to vigorous building.

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.