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Four recession indicators flash red

A range of data now suggests that the US is set to contract during the next two quarters.

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by James Phillipps on Jul 20, 2010 at 11:43

Debate continues to rage about whether the recent spate of disappointing data is merely representing a slowdown in the economic recovery or whether investors should brace themselves for a full blown recession.

But with four key indicators now flashing red for the world's largest economy, the US, it may just be a case of when rather than if.

Firstly, the 13 week rate of change of the Economic Cycle Research Institute (Ecri) Weekly Leading Indicator has fallen to -8.3%, which typically indicates recession and not just a slowdown.

The index, a composite index of financial and economic variables, has slumped markedly over the last quarter.

Chad Starliper, chief investment officer at Rather & Kittrell, says: ‘The decline in a shorter-term growth rate of the index (13 week percentage change, annualised) has fallen to -27.7%. To put this number in context, since 1968 there have only been six times the rate has crossed below -23.5% (February 1970, October 1974, April 1980, December 2000, September 2008 and June 2010).

‘Of the five instances prior to this year, all were in recession or entering one.’

Second up is the contraction in broad money supply (M3), which began in May this year and has since dropped by 8%, even lower than in the recessions of 1970, 1975, 1980 and 1990, when on average M3 contracted by around 5%.

Third is the Recession Warning Composite Index, which is tracked by high profile US fund manager Dr. John Hussman, the founder of Hussman funds.

This index comprises four recessionary indicators that have proven unerringly accurate.

Hussman says the first criterion is widening credit spreads between either commercial paper and three month Treasuries or between the Dow Corporate Bond Index and 10 year Treasury yields, both of which have increased over the past six months.

Next is a moderate or flat yield curve with a yield spread between the 10 year Treasury and 3 month Treasury of below 3.1% a sell signal and it is currently at 2.94%.

Hussman’s third indicator is stock prices below their level six months ago and lastly moderating ISM and the PMI below 54 (it is currently at 56.2) and employment growth of less than 1.3% year on year (it is currently 0.4%).

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6 comments so far. Why not have your say?

Hmmm recessions mean everything gets cheaper

If this is true, then it is time to get buying property...

(Rubs hands with glee)

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LANDLORD X, Fine if you can borrow the money to buy property, but one of the reasons property will be cheaper is because banks aren't going to be prepared to offer people 125% mortgages, self certified (liar loans) mortgages, 5 or 6 times your gross salary mortgages or give Buy To Let mortgages to anyone. These have proven to be unsustainable and when interest rates return to normal levels people can't afford to pay them. So if you have the cash then fine, spend it, but if you don't you will have to borrow money like everyone does and see how many times your income the banks will lend you.

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Landlord X should keep in mind that when the property market dives most of what is on offer at fire sale prices will not be worth having. The plush inner city flats are generally poorly built, cramped in size and will be the slums of the future.

Jonathan is right that money is hard to come by and we are facing deflation, at least in the short term, but this results from there being too little capital around to buy property.

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I totaly agree with X Landlord

Im buying more property at present and makeing yeilds over 10% so positive cash flow

Im one landlord who has never bought new build property

I bought property in the days when intrest rates were 15.4% and property was selling very badley

Looking back the buy I bought then have been the bedrock of my bussiness and now provide me with the largest yeilds

This period will be the same as early 90s for prudent landlords the deals are there

you have to put down large deposits of around 30% to get a good mortgage deal but some prices are so low that its a gift

Im an investor not a day trader so even if propertys go down in the next10 years im really not bothered i know rents will rise and thats what im looking for

I never sell property there is a silverlineing in all bad things you just have to open your eyes to see them

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It is a remarkable tribute to the British obsession with residential property that the only responses to an item on the US economy have been yet again to trot this old warhorse around!

For what it's worth, I am inclined to think that the US economy could get away with a growth slowdown and not a double dip, but it may be a close-run thing. One aspect of this is certainly that the free supply of residential property there has meant that it is much more difficult for house prices to recover, thus many mortgages remain under water, representing an additional discouragement to consumer spending.

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david harrison

Jul 21, 2010 at 16:34

Greedy people buying more than one property to rent out,should be made unattractive to do so- higherr taxes on second properties.

Give the youngster a chance to get on the property ladder, everyone should be able to afford a roof over their head.

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