As the year 2016 progresses, more discussions center around the possibility of recession. With extreme world market volatility, stock market twists and political uncertainty, one has to be alert for the possibility of recession in the general economy and, more importantly, in the agricultural and rural economies. However, to monitor signs of a pending recession, one must first recognize the historical components of a recession as well as the lead economic indicators that provide insight. It is also imperative to consider now what implications a recession may have on your business in the future.

Definition of Recession
A “textbook” recession is defined by two consecutive quarters of negative GDP or gross domestic product growth. However, a recession officially occurs when the National Bureau of Economic Research (NBER) finds a significant decline in economic activity lasting more than a few months. The most recent recession was named the “Great Recession” due to its depth and breadth. After examination of the Great Recession, the NBER declared in 2008 that the U.S. had been in recession since December 2007. Similarly, in September 2010, NBER announced the recession ended in June 2009. Not surprisingly, many people question why financial and government officials are often late in declaring both the beginning and the end of a recession. Their premises are based on significant data trends, which lag behind human behavior in the marketplace. Therefore, some time delay is normal.

Expansion and Recession Cycles
Examining economic cycles since the Great Depression, the typical economic expansion averages 58 months, or approximately five years. Contrasting that to recession cycles, one finds an average of around 11 months, or one year. Simply put, the U.S. economy usually has five good years and one bad year. Since 1980, many economists have discussed the concept of “Great Moderation.” That is the result of central bank intervention and preemptive practices to stimulate and constrict economic activity through interest rate decisions and other monetary policy, extending positive cycles.

In more recent years, the average business expansion period was 84 months, or eight years; recessions averaged seven months, or approximately one half of a year. During Paul Volcker’s time as Federal Reserve Chairman, business expansion established a record of 106 months. This metric was exceeded during Alan Greenspan’s Federal Reserve Chairmanship for a record of 120 months. As of today, the U.S. economy is in its 80th month of business expansion since the last recession. Will the expansion last 100 months? Of course, only time will tell.

Leading Economic Indicators
The Leading Economic Index (LEI), or more specifically the changes in variables tracked by the Conference Board, can be a precursor of possible recessions. Often used in weather forecasting, the ancient rhyme used by mariners, “Red sky at night, sailors’ delight; red sky in morning, sailors take warning” is also applicable in economics.  The LEI is made up of 10 components such as stock prices, building permits, average claims for unemployment insurance and others. The diffusion index quantifies the proportion of the 10 components that are contributing positively, which is a measure of the overall strength of the LEI.

If the level of the LEI increases, that is considered positive, which is generally indicative of favorable economic conditions. However, if it is down 3/10 of 1 percent for three consecutive months and more than 1 percent in that period, the probability of a recession in three to six months increases dramatically. In fact, this conservative indicator predicted every recession since the Great Depression, but also predicted five recessions that did not occur. This was the result of preemptive practices by the Federal Reserve, and an example of the “Great Moderation” concept. Of course, the job of the Federal Reserve is to monitor economic conditions and make adjustments in interest rates and monetary policy to either stimulate or constrict the economy.

The LEI has been positive for the past few years, but currently is in a slight decline, although not to recessionary levels. The diffusion index is approximately 50-50, which suggests a sluggishness in the U.S. economy.

Another indicator to watch closely in the U.S. and abroad is the Purchasing Managers Index (PMI), which is predictive of the manufacturing sector. Although the movement from a manufacturing economy to a service-based economy diminished this sector’s importance, this index still has power in providing insight on the direction of the economy. Generally, if this monthly metric registers above 50, the economy is expanding. If this indicator exceeds 60, the economy is probably overheated. A metric under 50 finds a constricting economy while any number below 42 suggests a recession. For a point of reference, the PMI fell to the 32 range during the Great Recession of 2008 to 2009, second only to the Great Depression when the measure was less than 30.

Current PMI readings suggest alarm for both the U.S. and other leading economies such as China and the European sector. Recent numbers are consistently under 50, which suggests the manufacturing sector is in or near recession. In the U.S., this metric has been under 50 for four consecutive months, which is similar to the three previous recessions.

Next, another popular leading indicator is the yield curve. This compares the short-term interest rates (three-month treasury bills) to the longer-term ten-year rate. A steep yield curve suggests a strong economy where long-term rates are significantly above the rate of three-month treasury bills. A flattening or inverted yield curve is highly suggestive of a recession. To build this case, examination of each eight recessions since 1959 demonstrated either a flat or inverted yield curve. This indicator is often used in other countries as a forecaster of economic direction as well. Currently, the yield curve is flattening slightly, which again suggests a slowdown in the U.S. economy.

Behavioral Economics
The discipline of economics is often not about logic and numbers, but based upon human behavior and confidence in the economy. A metric to closely watch is the University of Michigan Consumer Sentiment Index.  If this metric is above 90, consumer sentiment, which drives the service-based economy, is strong. If the number is between 80 and 90, a softening trend is indicated. Any number under 80 is considered weak and suggests suppressed economic growth, particularly in the service sector. The current trend of this number is still above 90, yet has trended downward in recent months.

Interestingly, an indicator that is closely watched across the globe is copper prices. Copper is used in products ranging from irrigation pumps to the lining for former NFL quarterback Brett Favre’s support sleeves.  In the period 2009 to 2012, the height of the great commodity super cycle, copper prices ranged from $3.33 to as high as $4.44 a pound. Current copper prices are in the $2 range, another sign of the slowing economy not only in the U.S. but abroad as well.

Behavioral economics require an additional aspect beyond the numbers. For accuracy in forecasting, one must gather additional readings from those on the “front lines” of the economy. For example, the Baltic Dry Index is often used as a gauge for international trade by sea. Examination of rail traffic along with the amount of back-hauls on trucking routes can provide insight for future direction of the numbers. Others gauge economic activity by rentals, moving trucks or the amount of garbage put out for weekly collection. Some economists may suggest these types of observations are “fluff” without logic or backing. However, the economic predictions from these sometimes unusual observations suggest the contrary. Currently, behavioral economics are definitely in a retraction mode, which along with trucking loads and the Baltic Dry Index sound like an alarm.

Impact on Agriculture
Recessions have global impacts. However, looking specifically at agriculture, a recession can bring regional and enterprise-specific impacts as well. For example, the great recession of 2008 and 2009 centered on housing, but was devastating to the timber and horticulture industries, which are directly linked to the housing sector. This most recent recession was more intense on the East and West Coasts along with certain areas in the southern U.S. Additionally, farmland that was in transition for development also felt the impact of the recent economic downturn.

Food prices and life essentials are always a focus in any recession. Historically, the livestock sector suffers in recession because often, poultry and pork are substituted for beef as consumers seek lower-cost items in their food budget. Additionally, recessions often weaken the U.S. dollar. This is actually positive for exported agricultural commodities as a weak dollar encourages exports.

Lastly, if an economy is in recession, interest rates are usually lowered, which can benefit those borrowing money, particularly on a variable interest rate. Unfortunately, recessions also tend to dampen the ability of individuals to find work or to grow their wages. This can make things particularly challenging for those in agriculture who depend on off-farm income. In fact, for many mid-size or small farms, changes in off-farm income can be devastating.

Economic cycles will always be a part of American farm and ranch life. As a producer, one must be aware of not only the direction of an economic cycle, but also the duration and extent. The ability to re-direct your business according to the economic cycle is crucial. Undoubtedly, economic cycles play a significant role in the profitability and sustainability of farm and ranch businesses. However, it is the business and personal decisions made by each individual farmer and family that determine sustainability.