Hussman: Four Things To Look For As A Harbinger of Recession
John Hussman is out with his latest weekly and he discusses… the ECRI Leading Indicators of course. Everyone is talking about these numbers. He is bearish, but as I have also noted the ECRI data are not yet predicting recession. However, he does give us four things to look for as the harbingers of recession.
The following is our refined set of "Aunt Minnie" criteria for identifying oncoming recessions. See the November 12, 2007 comment Expecting a Recession for details. In every instance we’ve observed these conditions, the U.S. economy has either already been in a recession, or has been within a few weeks of what turned out in hindsight to be the official beginning of a recession. There have been no false signals.
1: Widening credit spreads: An increase over the past 6 months in either the spread between commercial paper and 3-month Treasury yields, or between the Dow Corporate Bond Index yield and 10-year Treasury yields. This criterion is currently in place.
2: Moderate or flat yield curve: A yield spread between the 10-year Treasury yield and the 3-month Treasury yield of anything less than 3.1%. As of last week, the 10-year Treasury yield was 3.22%. The 3-month Treasury bill yield was 0.08%. So virtually any decline in the 10-year yield from here will put this criterion in place.
3: Falling stock prices: S&P 500 below its level of 6 months earlier. This is not terribly unusual by itself, which is why people say that market declines have called 11 of the past 6 recessions, but falling stock prices are very important as part of the broader syndrome. This criterion is currently in place.
4: Moderating ISM and employment growth: Manufacturing PMI (at or) below 54, coupled with either total nonfarm employment growth below 1.3% over the preceding year (this is a figure that Marty Zweig noted in a Barron’s piece years ago), or an unemployment rate up 0.4% or more from its 12-month low. At present, both of the employment measures are in place. Last month, the ISM PMI dropped from 60.4 to 59.7.
It makes sense that these are his four areas to watch. The NBER looks to employment, production, income, consumption and overall growth. Hussman has most of this covered in his four indicators. I would add some retail sales and income numbers to the mix to round out the signs. But, here’s the money quote – and the reason to be worried:
In short, it is small relief that neither the ECRI Weekly Leading Index nor our recession risk Aunt Minnie have provided confirming evidence of a double dip, because both would require rather minimal extensions of their recent deterioration to go to a hard warning.
Much more at the link below.
Source: Born on Third Base – John Hussman