In early February I wrote that John Hussman’s recession warning criteria had been invalidated. Oversimplifying somewhat, Hussman’s 4 criteria were: (1) credit spreads wider than 6 months before; (2) the S&P 500 lower than 6 months before; (3) the ISM manufacturing index under 54 simultaneously with less than 1.3% YoY employment growth; and (4) a yield curve of less than 2.5%. In closing, I said that Hussman should at least explain why he believed his recession call was still valid. Put another way, what is the “off” switch for the above criteria, if it is different from the “on” switch?
The next week Hussman spent part of his weekly market comment defending that call. His defence rested, as I understand it, on two grounds: (1) one or more criteria was violated in 2008 and the recession warning, obviously, was still valid; and (2) there is no “off” switch for the criteria, but rather, once “on,” a cornucopia of bearish evidence may be invoked, and entirely different criteria, e.g., a positive ECRI growth WLI, signals the end of recession.
Well, Hussman’s recession criteria just blew up. Yesterday, the ISM manufacturing index came in at 54.8. YoY employment growth is about +1.5%. The stock market is higher than it was 6 months ago. Credit spreads between corporate bonds and 3 month treasuries are lower than they were 6 months ago. Every single one of Hussman’s recession warning criteria is now invalidated, with the sole exception of the yield curve being less than 2.5% (which it was for several decades near the mid 20th century, and probably will be again now). In the past this has only happened once the economy moved out of recession into recovery.
The icing on the cake is that the “all clear” signal that Hussman said he would recognise — the ECRI WLI growth index turning positive — has also come into existence for the last 3 weeks. I really don’t see any wiggle room left. Under the terms he himself set, Hussman’s recession index says we are in expansion.
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