Thus, to change our call and predict a US recession, we would need to see the following:
- The non-manufacturing sector would need to be weak for a recession. A drop in our composite ISM index, which combines the two ISM surveys, to below 49 would be consistent with negative quarterly GDP growth. The most recent reading was 54.4 in December, held up by a still solid ISM non-manufacturing index.
- Weekly initial jobless claims, which typically lead a recession by 6-12 months, would need to rise to around 350k and above to be consistent with recession. The recent reading was 293k (potentially upwardly biased due to seasonal adjustment problems around holidays).
- Gross hiring and voluntary quits, which weakened about 12 months ahead of the last recession, would need to soften.
- Temporary employment, which has rolled over 12 months or more ahead of the last two recessions, would need to drop.
- The Treasury yield curve would need to flatten sharply. An inversion of the yield curve has typically given a 12-month or longer signal ahead of recessions. The message from the yield curve today, with a 120 bp spread between the 10-year and 2-year Treasury yield: zero probability of a recession over the next 12 months.
