Batten down the hatches

No … this isn’t a reference to Hurricane Dorian, which continues to pummel the northwest Bahamas and is expected to begin its long-awaited march up the Southeast coast later today.  Instead, this reference is to the looming risk of a global recession.

According to a CNBC news article published Monday, September 2, 2019, the recession indicators are flashing signs of an economic slowdown brought on by slower growth abroad and the U.S.-China trade war. Here’s a quick overview:

1. The Bond Market and the inverted yield curve

In a healthy market, long-term bonds carry a higher interest rate than short-term bonds. When short-term bonds deliver a higher yield, it’s a called an inversion of the yield curve. This phenomenon has preceded the seven last recessions. The yield on the benchmark 10-year Treasury note has fallen below the 2-year yield several times since Aug. 14. If the past is any indicator, then a recession may occur 18 to 24 months after an inversion.

2. GDP is slowing

According to the U.S. Commerce Department, the economy expanded by just 2% in the second quarter. That’s the lowest growth rate since the fourth quarter of 2018 and down from 3% growth in the first three months of 2019.

3. Corporate Profits are down

Analysts estimated S&P 500 earnings growth for the year would be around 7.6%. Instead, they are now around 2.3%.

4. Manufacturing growth has slowed

The Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting.

The headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction, and a reading at 50 indicates no change. The further away from 50 the greater the level of change.

The PMI for August was 49.9, down from 50.4 in July. The reading has fallen below the neutral 50.0 threshold for the first time since September 2009.

5. Freight shipment slowdown

The Cass Freight Index (CPI) is a broad measurement of the monthly aggregate deliveries of U.S. freight. The CPI uses January 1990 as its base month. The index is updated with monthly freight expenditures and shipment volumes from the entire Cass client base. Volumes represent the month in which transactions are processed by Cass, not necessarily the month when the corresponding shipments took place. The January 1990 base point is 1.00. The Index point for each subsequent month represents that month’s volume in relation to the January 1990 baseline.

The CPI fell 5.9% in July, following a 5.3% decline in June and a 6% drop in May.

According to the July 2019 edition of the Cass Freight Index Report:

When the December 2018 Cass Shipments Index was negative for the first time in 24 months, we dismissed the decline as reflective of a tough comparison. In January and February 2019, we again made rationalizations. When March was also negative (-1.0%), we warned that we were preparing to “change tack” in our outlook; when April was down (-3.2%), we said, “we see material and growing downside risk to the economic outlook.”

With the -5.9% drop in July, following the -5.3% drop in June, and the -6.0% drop in May, we repeat our message from last two months: the shipments index has gone from “warning of a potential slowdown” to “signaling an economic contraction.”

We acknowledge that: all of these negative percentages are against extremely tough comparisons; and the Cass Shipments Index has gone negative before without being followed by a negative GDP. However, weakness in demand is now being seen across many modes of transportation, both domestically and internationally.

Although the initial Q2 ’19 GDP was positive, it was not as positive upon dissection, and we see a growing risk that GDP will go negative by year’s end.

6. Copper prices decrease

According to the article’s author, Maggie Fitzgerald, Copper is known as a barometer of economic health because of its use in home building and commercial construction. Copper prices have fallen to a two-year low, as renewed trade hostilities between the U.S. and China reinforced fears about the world economy. The commodity is down over 13% in the last half year.

7. Gold prices increase

Gold is known as a safe haven trade in times of economic uncertainty. Gold prices have soared more than 20% since May when the U.S. and China escalated their tariff fight.

8. Global Economic Policy Uncertainty Index

The GEPU Index is a GDP-weighted average of national EPU (Economic Policy Uncertainty) indices for 16 countries that account for two-thirds of global output. Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the economy, uncertainty, and policy-related matters.

The monthly Global Economic Policy Uncertain Index hit its all-time highest level, 342, in June and the monthly US Economic Policy Uncertain Index hit 285 for August.

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