We'll get an update on two quarterly long leading indicators - fixed private residential investment and proprietors' income - on Friday with the Q3 GDP report. Before that, though, I thought I would update the two long leading indicators that make up the "Kasriel Recession Warning Indicator" that is one of the systems I make use of.
The "Kasriel Recession Warning Indicator," named for Paul Kasriel, formerly of the Northern Trust Co., and currently a Senior Advisor at Legacy Private Trust Co., holds that when two conditions are met: (1) an inverted yield curve as measured by the 10-year Treasury bond and the Fed Funds rate, and (2) real adjusted monetary base turns negative, a recession follows within twelve months. It has been "infallible" since the 1960s.
Here's what it looked like back in the beginning of 2007, when he used it to accurately forecast a recession in late 2007 or 2008:
Updating the indicator is of particular interest now, because two months ago Kasriel wrote that the second condition had been met, and he expected the requisite yield curve inversion by the end of this year, therefore he expected a recession by the end of 2019. Here's his supporting graph:
The monetary component
Below, I've updated both of the criteria in reverse order. First, here is the historical record before 2008 of monetary base + bank reserves deflated by CPI, measured YoY:
Now here is the same data updated since 2010 (I've skipped 2008-09 because of the huge increase in monetary base that would render the rest of the graph tiny squiggles):
As you can see, the second part of Kasriel's criteria remains met, at levels consistent with his previous recession calls.
For what it's worth, while another variant on this indicator, real money supply as measured by real M2, has decelerated enough to also be consistent with oncoming recession, real M1 has not - yet. The below graph shows CPI (red), nominal M1 averaged monthly through September (Blue), and nominal M1 weekly through last week, all normed to 100 as of one year ago:
Real M1 was on the cusp of turning negative until the 4% spike during September. Should that be an anomaly vs. a change in trend, real M1 could still turn negative possibly by the end of this month.
The yield curve component
Now here is the 10-year minus Fed funds yield curve, first the long historical perspective:
And now zooming in on the last five years:
Because Kasriel's recent graph made use of the 1-year Treasury rather than the Fed funds rate, here is the last five years of that metric:
Regardless of which of the two variations on the yield curve we use, neither one looks set to invert by the end of this year. The trend line for each is more consistent with an inversion in the second half of next year, if the Fed continues to raise rates.
The bottom line is that the "Kasriel Recession Warning Indicator" has not been triggered yet, although if present trends continue, it will be triggered next year sometime.
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