Recession Signals That Have Already Gone Off

“The world has never had as much debt as it has now,” wrote Aaron Kurilof in The Wall Street Journal earlier this year. Now, there is even more…debt, that is.

The combined debt held by governments, consumers and businesses has risen to +300% of the global domestic product…higher…notably higher than the combined debt level in 2007, which was 260% of the global domestic product.

Consumers worldwide have curbed their debt but governments and companies outside of the financial sector have taken on more. According to The Wall Street Journal, there is riskier corporate borrowing in the US, corporate debt in China and foreign currencies borrowing in emerging markets. And historically, during the 1920’s and early 2000’s, periods of extreme economic inequality have been predisposed to serious financial downturns.

According to Anne Srader in Fortune Magazine, here are the “Recession Signals That Have Already Gone Off”:

1. The New York Fed’s Recession Probability Index has broken 30%.
   32. The probability of a recession hit 32.9% in July 2019.
   33. This is the highest probability index score since 2009, according to the New York Fed.
   34. This probability index looks, in large part, to the yield curve to determine the likelihood of a near recession and the yield curve has been inverted since May 2019. An inverted yield curve is the proverbial indicator of a coming recession.
   35. Lisa Shalett, Morgan Stanley’s Wealth Management’s chief investment officer, told Fortune that her firm recommends “caution as recession indicators are now ‘flashing yellow.’”
2. The Yield Curve has been inverted since May 2019.
   1. 3-month Treasury bills with shorter maturity have higher yields than 10-year Treasury notes with longer maturity.
   2. Morgan Stanley again told Fortune “…the negative spread of 1.95% for the falling 10-year yield compared to the 2.15% for three-month Treasury bills hit its widest point spread yet.”
   3. Such a negative point spread between 3-month and 10-year notes translates into investors having less confidence in older bonds than in newer ones. If nothing else, such a point spread “…certainly grabs everyone’s attention,” said Chris Dillon, a multi-asset investment specialist with T. Rowe Price.
3. Consumer and business confidence, though historically high, dropped to a 2-year low, according to the June 2019 monthly Conference Board report.
   1. According to Mark Hamrick, a senior economic analyst with Bankrate.com, there is growing bearishness towards the economy because the trade war with China appears to be “far from over. Perpetual trade protectionism is the number one issue…” fueling business uncertainty.
   2. “Trade concerns,” said Max Gokhlman, head of asset allocation with Pacific Life Fund Advisors, ”are paramount to souring business confidence.
   3. According to Morgan Stanley, waning business confidence is already impacting economic growth and weak earnings.
4. The Purchasing Management Index (PMI) is indicating is indicating a significant slowdown in expected manufacturing activity.
   1. Morgan Stanley’s Lisa Shalett said that the most recent economic reports indicate a “…slowing that is far worse than the 2015-2016 mini recession due to outright contractionary PMI data and global orders.
   2. According to Reuters in May 2019, factory activity dropped to a 10-year low.
   3. JP Morgan and Morgan Stanley have cut Q2 GDP estimates to 1% from 2.25% and 1.9% from 2.2% respectively.

Best-case scenario for Hamrick is a “soft landing” rather than another recession.