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Friday, July 7, 2023

Why are we confident that we're facing an impending US recession?

The 2 most important precursory factors for indicating a recession are flashing a RED signal.

Before we embark on the interpretation, please read our previous post below on how an economy works.

CPI/PPI --->> M1-M2 spread/3m-10y yield spread --->> PMI --->> GDP

Let's focus on the 1st factor (3m-10y yield spread) first.

As shown on the yield spread chart, whenever there was a yield curve inversion (negative yield spread), a recession would follow thereafter.

The 2nd factor (PMI) had been contracting for the past 8 months.  This consecutive contractions in PMI will impact or show up on the GDP eventually because the GDP is a lagging indicator on economic growth.

Since both factors impact the GDP and are flashing RED signals, we don't see how the US can avert a recession.  This has become a WHEN question and not WHAT IF.

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