The recent inversion of the yield curve in the United States may also cause the Fed to respond quickly.
That’s because yield curve inversions, which occur when short-term rates move higher than longer-term bond yields, have been pretty reliable predictors of economic recessions. If investors are so worried about the next few months that they demand higher interest rates for a short-term bond than a 10-Year Treasury, that’s a worrisome sign.
Some market experts have dismissed the inversion as a fluke phenomenon driven by the fact that investors are rushing to buy US bonds as a sign of confidence in America’s resilient economy. After all, yields move lower as bond prices go up.
But there are other important barometers that investors need to pay attention to as well — and they also are flashing yellow caution signs for the economy.
The most recent ISM Manufacturing Index report, released Monday, painted a sober picture for America’s heartland. The index fell to its lowest level since October 2016. The weakest manufacturing reading of the Trump presidency could be a sign that the trade spat with China is taking its toll on US businesses.
Manufacturing is weakening
“There is a big concern that businesses may pull back on spending,” said Michelle Girard, co-head of global economics and chief US economist for NatWest Markets.
“We’re worried about growth slowing. There are a lot of reasons for businesses to wait and see what happens next,” Girard added.
Industrial commodities are falling
Many investors pay attention to oil and gold. But there are other commodities that are just as important because demand for them is linked closely to the health of the global economy. And they are tumbling.
Copper prices have fallen 6% in just the past month while zinc is down 8.5%. Copper and zinc are big components for many industrial and technology companies. People pay so much attention to copper as a barometer that traders jokingly call it Dr. Copper, as if it has a PhD in economics.
Lumber prices are falling as well, plunging about 10% in the past month. That could be viewed as a sign that the housing market — particularly new home construction — is weakening.
“Is there an imminent recession? No. But the base case is slower growth and the data reflects that,” said Melissa Weisz, a wealth adviser at RegentAtlantic. “It is softening even if it’s not screaming that a crisis is coming.”
Leading indicators leading to slowdown?
Every month, the Conference Board publishes its Leading Economic Index (LEI). The index ls closely watched because it incorporates 10 different important gauges of the health of the economy, such as weekly jobless claims, manufacturing new orders, housing building permits, stock prices and consumer sentiment.
The most recent LEI figures could be viewed as a troubling sign. LPL Research noted that LEI was up just 2.7% from a year ago in April — the slowest increase since February 2017.
Not that long ago, LEI was up 7%. LEI could decline by the end of this year, predicts Matt Miskin, market strategist with John Hancock Investments. When that happens, a recession often comes several months later. At the very least, it’s a sign of an economy losing steam.
“Fundamentals are slowing,” Miskin said, adding that even if the United States can come to an agreement with China, Mexico and others on trade, that might not be enough to avoid the inevitable.
“We’re still late in the cycle,” he said. “Add tariffs and the slowdown accelerates. Take tariffs away and it’s just more gradual.”