US data and yield curve spook investors

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US manufacturing is shrinking for the first time in three years

Conflicting data from the US economy has left economists scratching their heads, says Irwin Stelzer in The Sunday Times. But most shoppers seem to have shrugged off talk of a recession so far. That bodes well, given consumer spending accounts for about 70% of economic activity.

The monthly US non-farm payrolls data is seen as a key barometer. Some 130,000 jobs were created in August, fewer than expected and also less than the average of 200,000 per month seen earlier in this cycle. Alarmingly, the ISM manufacturing index also fell below 50 in August, which suggests that American manufacturing is shrinking for the first time in three years. Yet other figures show that wage growth has sped up and that the service sector remains robust. Most hard data has yet to show signs of impending recession, says Paul Ashworth of Capital Economics. What has spooked markets is the recent inversion in yield curves. Indeed, the ten-year and three-month Treasury yields have “never been [this] inverted… without a recession starting within the following 12 to 18 months”.

Last week did see the spread between the two-year and ten-year treasury uninvert, but that is little reason for cheer. Data shows that previous inversions have predicted a recession over the coming 24 months regardless of whether the curve has uninverted by the time the recession actually arrives.

The start of September has seen American stocks rally, says Akane Otani in The Wall Street Journal. The S&P 500 is up 19% this year so far and is back within 2% of July’s all-time high. Yet psychological factors may be curbing risk appetites. In addition to the trade and yield curve gloom, many money managers remember that last year the S&P peaked in late September “only to slump by a fifth in three months”.