John Hussman: Recession Risks No Longer Dormant

by: John Hussman

Excerpt from fund manager John Hussman’s weekly essay on the US market:

In my view, even the May gain in housing starts was an important negative, because in the context of how housing starts have behaved over economic cycles, we've already got a breakdown. You don't get much information from housing starts just by looking at whether they're up or down. You have to do a little bit of signal processing to extract the cyclical component... Despite the increase in May housing starts, the relevant cyclical component of housing starts has already rolled over, and such rollovers have historically tended to continue (1995 was an exception). Given current economic and interest rate conditions, a continuation appears likely here...

In the context of slowing employment growth, a stall in aggregate weekly hours, an emerging widening in credit spreads, and other factors, my impression is that recession risks have increased considerably.

That said, we are still not at the point where I would view a recession as imminent. The main factors that would create that expectation would be a further flattening in employment growth (not necessarily a downturn, just growth in non-farm employment of less 0.5% on a 6-month lookback – which would require employment growth to average about 100,000 jobs per month or less over the next quarter or so), a weakening of the ISM figures toward or below 50 (not all declines below 50 indicate recession, but at present, such a decline would be a strong confirmation of negatives in other indicators already suggesting caution), and a further widening of credit spreads, particularly between 6-month commercial paper and 6-month Treasury bills.

For now, suffice it to say that recession risks are no longer dormant, but aren't yet acute.