Recession indicators: How do we know if the economy is in trouble?

CTV News

18-05-2025

Bank towers are shown from Bay Street in Toronto's financial district, on Wednesday, June 16, 2010. THE CANADIAN PRESS/Adrien Veczan
As a global trade war marches on, economic uncertainty has sparked fears of a recession on the horizon, bringing layoffs, bankruptcies and deepening affordability challenges with it.
But for as long as there have been hard times, there have been a mountain of strategies to try and see them coming. And while economists routinely track hard data like GDP, unemployment and inflation, analysis can fold in all kinds of indicators -- including some that seem obscure, or strangely specific.
From cardboard boxes, lipstick and men's undergarments to law school entrance exams, here are some supposed signs the economy might be on track to contract:
Could there be a recession?
As defined by the C.D. Howe Institute, an economic recession is a "pronounced, persistent, and pervasive decline in aggregate economic activity," and while it isn't always the case, a market is typically considered in recession if it's gone through at least two consecutive quarters with a decreasing gross domestic product (GDP).
Economists rely on a variety of financial data to predict recessions, including GDP performance, total sales of goods, unemployment rates and the yield curve, or the difference in interest rates on shorter versus longer-term bonds.
The path ahead for Canada's economy is unclear, as predictions differ as to whether the country is headed for a recession in the next two years. RBC's May update shows slowing growth heading into 2026, but TD Bank's and Deloitte's spring outlooks forecast back-to-back quarters of contraction in the near future.
'The trade conflict has made the outlook for the Canadian economy highly uncertain‚" reads a recent Bank of Canada report that found that the economy could be facing a yearlong recession, should the trade war's impacts linger.
Uncertainty clouds predictions of the future for an economy already in trouble before the trade war, says University of Ottawa economics professor and Canada research chair Isabelle Salle.
'Tariff(s) and this uncertainty shock just added to existing problems, at the worst time possible,' she told CTVNews.ca in an interview Thursday. '(With) uncertainty, you cannot easily put probabilities attached to the different scenarios. You really have to operate with just options.'
Salle says that unlike the financial crisis of the late 2000s, which had a more identifiable impact and response, not only do we not know how bad things could get in the coming months, it's also hard to know the solution.
'We don't know exactly what is going to be the size of the shock, how long it's going to last, but we're also not sure what is this shock … Is it a supply shock? Is it a demand shock? Is it a bit of the two?' she said.
'This is a little bit more complicated, I would say, than the 2007 crisis.'
Economic anxiety
Aside from the recent hard data, also key are forward-looking indicators like consumer confidence surveys, where large numbers of people are asked how they feel about the economy's health and future.
At last tally, the Bloomberg-Nanos Canadian Confidence Index showed a positive rebound, following notable declines amid the recent height of trade tensions. Rated at 48.59 as of May 9, the index has nearly returned to the 50-point benchmark, which signifies a net-neutral opinion among consumers.
'After a consistently negative trajectory since the election of U.S. President Trump, consumer confidence is improving in the period following the election of the Mark Carney government,' said data scientist Nik Nanos, in a release.
Walid Hejazi, a professor of economic analysis and policy at the University of Toronto, notes that in hard economic times, consumer confidence can add fuel to the fire.
If consumers fear a recession is coming, he explains, they may reduce their spending to prepare, but reduced consumer spending makes the economy slow down even more.
'That, in and of itself, makes a recession more likely,' he said in a Thursday interview with CTVNews.ca. 'That's where that self-fulfilling (prophecy) comes in.'
Lipstick, underwear, cardboard boxes
But recession indicators don't stop at broad aggregates of business performance and public opinion. Some economic signals can be far more niche, and even bizarre.
Among modern economics' oldest indicators is "hemline theory," which holds that the market shifts toward shorter skirts in times of plenty (think: the Roaring 20s) and longer ones amid economic downturns (the Great Depression).
While some academic research has debated on the statistical significance between skirt length and overall economic health, the idea of working backwards from consumer trends has caught on.
It's often said that as the economy recedes, shoppers cut back on big-ticket luxuries like cars or gadgets, but spend more on small nonessentials, a form of retail therapy commonly known as the "lipstick effect."
Conversely, former U.S. central banker Alan Greenspan popularized the "men's underwear index': a recession indicator based on the idea that, when money is tight, men delay purchases of the one item of clothing seen least often in daily life.
Hejazi says phenomena like these can help illustrate correlation versus causation, but they can also be instructive examples of how the economy impacts not just our total spending, but also where it's concentrated.
'There seems to have been some fundamental change in people's spending patterns, and many people think it's probably because of the huge crisis we have in affordability,' he said.
Salle notes that Canada's economy is particularly reliant on consumer forces.
'Household consumption is a big, big, big deal of the GDP,' Salle said. 'We know that if you are going to cut on your budget, or postpone your consumption because you think it's going to be hard, and you better save, you are not going to cut, necessarily, on your food first.'
But it's not just about purchases; some behaviours understood to be market-driven can run deeper. A recent spike in applications for law-school entrance exams, for example, may signal to some that young professionals are seeking recession-proof careers, or at least a few years of school to wait it out.
According to economist Andrew Lawrence's 'skyscraper index,' the completion of a new world's tallest building is often followed by financial crisis, as such huge projects 'seem to mark a very large economic boom that typically ends in large recession,' he told the Council on Tall Buildings and Urban Habitat in a 2012 interview.
Jeffrey Kleintop, a strategist at financial services firm Charles Schwab, has examined sales of cardboard boxes as an indicator for the health of global manufacturing. All of those goods need to be shipped in something, after all; a drop in sales for packing materials may connote coming trouble for goods of all kinds.
While many indicators are based on logical, or at least linear market trends, others track phenomena completely divorced from dollars and cents, such as whether this Lunar New Year sparked a year of the dragon, who won the Super Bowl or even whether Groundhog Day predicted six more weeks of winter.
In a blog post early last year, Kleintop wrote that the popularity of "market folklore" makes for a 'testament to the very human desire for an easy answer,' despite its dubious relationship with accuracy.
U of T's Hejazi notes that even some of the most trusted indicators can be misleading, and often disagree with one another.
'Leading indicators are not determinative,' he said. 'They predict, but they don't always get it right.'