US flirts with recession

 The ISM for services came out last night. It "surprised the markets" by falling instead of rising.

The chart below shows the ISM for services and the ISM for manufacturing, both extreme-adjusted.

Note how there have been a few times in the past when one was going up and the other down.  However, over the last few months, since January this year, and Trump's trade wars, both have been falling.

The chart below shows the simple average of the two time series in the chart above.

In the past, when this average has fallen below these levels, there has been a recession: 1989-1991, 2001, 2009.  The trend is clearly down, and there is no reason to assume it will change.  The rise in tariffs is a significant fiscal shock, since, contrary to Trump's beliefs, it is American residents who will pay the tariffs, which are the equivalent of a rise in taxes.   In addition, there is the huge uncertainty imposed by his shilly-shallying.  One day the tariff is 10%, the next 35%.  Then it is postponed for 90 days.  Then because the leader of the other country doesn't suck up to Trump enough, it jumps to 50%.  Only to be postponed for a month.  People who invest in plant and equipment, and consumers who spend on consumption goods, close their wallets.  When cash is king, economies go into a recession.

This will be the first recession in my long involvement with financial markets, which has been entirely caused by rank stupidity.  And Trump's response?  He sacks the people who produce the stats.

The Fed isn't going to save the situation.  It will be reluctant to cut rates until it is sure that the inflationary impulse caused by the jump in tariffs has passed.   And when it does cut the Fed Funds rate, it will take 9 to 15 months for the economy to respond.