| McKinsey Classics | January 2019 |
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| Anticipating economic downturns |
| In the wake of renewed concern about the possibility of recession, McKinsey partner Tim Koller looks back at his 2010 article “A better way to anticipate downturns.” Below, Tim explains why the argument he made then, about the best indicators of a coming slump, remains useful for executives today. |
| A recent Duke University poll of US chief financial officers showed that many expect a recession to strike within the next two years. Polls of consumers and economists paint a similarly pessimistic picture. But how can anyone know when and how a crisis will start? I addressed just this question in the 2010 McKinsey article “A better way to anticipate downturns.” My colleagues and I had conducted analyses suggesting that executives should look closely at credit markets, particularly for parts of the economy with too much debt or loose lending standards. Our work showed that these markets were better bellwethers of change than equity markets, which always show volatility but don’t drive the economy as much as credit markets do. |
| Our analyses hold true today. Executives should pay close attention to credit markets and think about whether geographies or sectors—for instance, real estate, consumer goods, or government—are overleveraged, because that often indicates imbalances in the real economy. Unfortunately, once they arise, there is no way to prevent a correction; the best you can do is be prepared when you see it coming. To learn more, read “A better way to anticipate downturns.” |
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