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Excerpt from the Hussman Funds' Weekly Market Comment (8/1/11):

The overall impression from the data suggests the possibility that there is more information in the recent breakdown in market internals than can be explained by debt ceiling concerns alone. On that note, there are emerging economic signals whose leading tendencies are strong enough to make a review worthwhile.

...

The components of our recession warning composite might be called "weak learners" in that none of them, individually, has a particularly notable record in anticipating recessions. The full syndrome of conditions, however, captures a critical "signature" of recessions. That signature of "early warning" conditions is based on financial market indicators including credit spreads, equity prices and yield curve behavior, coupled with slowing in measures of employment and business activity. Every historical instance of this full syndrome has been associated with an ongoing or immediately impending recession.

The components (which I've reordered for simplicity) are:

1: Widening credit spreads: An increase over the past 6 months in either the spread between commercial paper and 3-month Treasury yields, or between the Dow Corporate Bond Index yield and 10-year Treasury yields.

2: Falling stock prices: S&P 500 below its level of 6 months earlier. This is not terribly unusual by itself, which is why people say that market declines have called 11 of the past 6 recessions, but falling stock prices are very important as part of the broader syndrome.

3: Weak ISM Purchasing Managers Index: PMI below 50, or,

3: (alternate): Moderating ISM and employment growth: PMI below 54, coupled with slowing employment growth: either total non-farm employment growth below 1.3% over the preceding year (this is a figure that Marty Zweig noted in a Barron's piece many years ago), or an unemployment rate up 0.4% or more from its 12-month low.

4: Moderate or flat yield curve: 10-year Treasury yield no more than 2.5% above 3-month Treasury yields if condition 3 is in effect, or any difference of less than 3.1% if 3(alternate) is in effect (again, this criterion doesn't create a strong risk of recession in and of itself).

...

A review of several confirming indicators of oncoming recession (see again the 2007 comment Expecting A Recession ) may prove useful in the coming months, either to ease concerns or to corroborate them. These indicators include

A sudden widening in the “consumer confidence spread,” with the “future expectations” index falling more sharply than the “present situation” index. In general, a drop in consumer confidence by more than 20 points below its 12-month average has accompanied the beginning of recessions.

Low or negative real interest rates , measured by the difference between the 3-month Treasury bill yield and the year-over-year rate of CPI inflation.

Falling factory capacity utilization from above 80% to below 80% has generally accompanied the beginning of recessions.

Slowing growth in employment and hours worked. The unemployment rate itself rarely turns sharply higher until well into recessions (and rarely turns down until well into economic recoveries). So while the unemployment rate is an indicator of economic health, it is not useful to wait for major increases in unemployment as the primary indicator of oncoming economic changes. As for employment-related data, slowing growth in employment and hours worked tend to accompany the beginning of recessions. Specifically, when non-farm payrolls have grown by less than 1% over a 12 month period, or less than 0.5% over a 6 month period, the economy has always been at the start of a recession. Similarly, the beginning of a recession is generally marked by a quarterly decline in aggregate hours worked.

...

Our overall impression is that the weakness we observed in the markets last week, particularly given the heavy damage to market internals, may convey more information than simply concern about the debt ceiling. There seems little doubt that investors will take a measure of relief from a favorable resolution of that situation. A failure of that advance would suggest that there is more to recent market weakness than meets the eye, and would contribute to more significant concerns about the economy itself.

Source: John Hussman: More Than Meets the Eye