The Wall Street Journal: Another Recession Sign to Ignore at Your Peril

Article by Aaron Back in The Wall Street Journal

Signs of a possible recession keep stacking up. At some point it no longer makes sense to keep explaining them away.

The latest grim omen came Tuesday as the Institute for Supply Management’s manufacturing index fell to 49.1 in August from 51.2 in July, signaling a likely contraction in manufacturing activity.

Market bulls will be quick to point out that an ISM reading in contractionary territory doesn’t necessarily signal an impending recession. The index did fall below 50 before each of the past three recessions, but it also did so in 1998, 2003 and early 2016. All three reflected genuine stress in the global economy that nonetheless failed to trigger a U.S. recession.

An inverted yield curve, on the other hand, has a much stronger track record as a predictor of recession.

The yield on 10-year Treasurys has dipped below that of two-year Treasurys before each of the past three recessions and at no other time over the past 30 years, aside from a couple very brief episodes. The argument for this being a false signal now is that central banks in Europe and Japan have distorted the curve with negative rates and aggressive bond buying, indirectly suppressing long-term U.S. rates.

This isn’t dissimilar to an argument heard prior to the last recession in 2007, though.

With both the yield curve and manufacturing surveys flashing red at the same time, it would be foolish to dismiss them both. No wonder investors are spooked.

To read this article in The Wall Street Journal in its entirety, click here.