The tech IPO market has become a good predictor of a recession and this chart shows why we may be due for another one soon
- The economy may be headed for a recession soon, data on tech public offerings seem to indicate.
- Over the last 30 years, one telling sign of a recession has been the portion of tech companies going public that were profitable.
- Profitability tends to hit a low ebb right before an economic downturn, a position we seem to be in again.
Warning: Another recession may be dead ahead.
It's hard to predict exactly when an economic downturn will happen. But if you had kept a close eye on tech initial public offerings over the last three decades, you might have noticed a telling pattern.
In the run to the last three recessions, the number of tech IPOs increased. More importantly - and more clearly - the quality of the companies going public (in terms of the number of companies that were profitable), declined right before each economic downturn.
You can see the trends in the chart below, which is based on data collected by Jay Ritter, a professor of finance at the University of Florida who has closely followed the IPO market. The trends are most marked during the dot-com boom and bust of the late 1990s and early 2000, when the portion of companies going IPO that were profitable declined markedly.
But you can also can them in the period right before last decade's Great Recession. And if you look closely, you can even discern them in the period before the downturn that hit the economy in the early 1990s.
As the chart indicates, that's what makes our current moment potentially so worrisome. Last year, the portion of tech companies going IPO that were profitable matched the lowest level it's been since the end of the dot-com boom. Among the class of 2017's money-losing companies that listed shares on public markets: Snap, Cloudera and MuleSoft. Meanwhile, the number of tech offerings is expected to jump significantly this year.
