Infallible or not, the yield curve is a cliché as a recession indicator.
Indeed, those pursuing originality in forecasting during the post-GFC era often engaged in an effort to explain why the curve is no longer the reliable prophet it once was. After all, a lot of the factors distorting developed market government bond curves weren’t present decades ago.
As everyone with even a passing interest in markets knows, the US curve began predicting a downturn for the world’s largest economy as early as a year ago. The signal, to the extent you’re still inclined to trust it, is unambiguous+, particularly after last month’s ominous 2s10s re-steepening.
But what if you don’t want to go by the curve? As late as January, even Cam Harvey suggested the signal might be a false alarm this time, although he reversed course in April to say the curve is correct in predicting a recession. “Fortunately” (with the scare quotes to denote that most people don’t love recessions), there’s ample evidence for “Recession Now,” as BofA’s Michael Hartnett put it, that doesn’t rely on the curve.
This isn’t merely an excuse to highlight a few charts and a handful of factoids, although it’s mostly that. The visual below shows Taiwan industrial production, and beyond the dire signal the island’s factories may be sending about the global economy, what’s notable currently is the extent to which Taiwan is now seen as a bellwether for two kinds of hard landings: Economic and geopolitical.
Industrial production dropped 14.5% in March versus a year ago, data out last week showed. That was more than expected, and the biggest drop since 2009 excluding January and February, which can be distorted by the Lunar New Year holiday.
Consistent with TSMC’s warning on capacity utilization, manufacturing production dropped more than 15% last month. Recall that Taiwan’s exports are mired in a deep slump+, a function of lackluster global demand, particularly for electronics. As I (very darkly) joked a few weeks ago, exports would be constrained further by a PLA blockade.
The Taiwan industrial production data is “a good global recession indicator,” according to BofA’s Hartnett, who cited similar slumps in 2001 and 2009, and noted that Chinese imports are falling again after a fleeting rebound.
Hartnett mentioned a bevy of additional canaries. “Oil can’t catch a bid despite big OPEC supply cuts,” he wrote, adding that sub-45 ISM prints (which may be coming) “always equaled a US recession over the past 70 years.”
Maybe we should be going by ISM instead of the curve. As it turns out, two-thirds of global manufacturing PMIs are currently below the 50 demarcation line. I should mention the stark bifurcation with services activity, which, depending on the locale, remains robust.
Additional “recession now” indicators include falling house prices across the developed world and tighter lending standards to small businesses on the heels of rate hikes and bank stress in the US.
Also, as discussed in the latest weekly, US M2 growth is the most negative since the Great Depression+, which could presage disinflation, but may also have deleterious effects on growth.
“Supply versus demand side economic arguments are left to far smarter minds than ours, but the magnitude of the drop in US money supply means that there will almost inevitably be an observable flow through to realized economic performance,” BMO’s Ian Lyngen and Ben Jeffery said.
They went on: “Money velocity is a crucial contributor to economic activity and the correlation with the unemployment rate in terms of trajectory (if not necessarily level) leaves us concerned that a reversal of the pickup in velocity we have seen will come along with a higher unemployment rate.”
Monetarism continues to enjoy a minor renaissance.
