World bond bloodbath

 Bonds are being heavily sold off.  (Reminder:  yields rise as prices fall)

It's because of :

• the Iran war, and its effect on oil prices and inflation.  
• ballooning US deficits
• concern that the Fed won't fight inflation
• Japan's economic unravelling
• stubborn inflation, not just in the US, but in Europe and elsewhere.
• the beginning of Central Bank tightening.
• strongly rising commodity prices — it's not just oil.

When bond yields rise, it's a signal of tightening credit.  The riskier the borrower, the bigger the rise in the interest rates they must pay to obtain credit. (That's why national government bond yields haven't risen by equal amounts over the last 2 years). At some point, the elastic snaps, and companies and possibly countries start going bankrupt.  Which leads, inevitably, to a recession.

The AI bubble is dependent on credit and circular financing.  When outside credit flows dry up, it will pop, taking down the economy and share markets with it.

Every previous oil crisis has been followed by a recession, and the bigger the relative increase in prices, the deeper the recession. 

Commodity prices point towards higher inflation

A surge in commodity prices usually precedes (and leads to) a surge in consumer price inflation.

You could argue that the rise in overall commodity prices is mostly oil.  But other commodity prices are also going up (see lower chart), although that is partly because methane (natural gas) is used to make fertilisers.

Note logarithmic scale

My "brekkie" index  — an equally weighted index of corn (maize), wheat, oats, cocoa, coffee, sugar and orange juice — has been surging since Trump's Iran War.

N.B.  Log scale

If inflation remains stubbornly high because of higher oil prices and surging general commodity prices, Central Banks will, albeit reluctantly, raise interest rates and tighten credit.  And that will pop the private credit and the AI bubble, driving the economy into deep recession.

Trump's legacy will long outlive him, just not in the way he thinks.

Oz recession deepens

This is an unweighted composite index^ of the AIG (Australian Industry Group's) PMIs for manufacturing, services and construction, and S&P Global's PMIs for manufacturing and services.  The AIG indices have been smoothed with a 7-month centred moving average before inclusion in this composite index.

Conclusion: the Ozzie recession* continues.

^ Note on composite indices.

Since time series are subject to random month-to-month and quarter-to-quarter fluctuations, interpreting the data can be tricky. You can reduce this random variability by adding two or more statistically independent series together.  This will reduce the error term without affecting the underlying trend.  Or you can fit a moving average to the data, which also reduces the error term, as each month's "error" is statistically independent of the previous month's.  I tend to do both.  So, this composite index of 5 different time series, 3 of which have been smoothed before inclusion, should give us a much more reliable indicator of the economy than any single component.

* Note on the definition of a recession.

The conventional definition (in the media, anyway) is two quarters of consecutive negative GDP growth.   A moment's thought shows that this is not a useful definition.  Just one example—suppose GDP falls by 5% in Q1, rises by 0.1% in Q2 and falls again by 5% in Q3.  It is crystal clear that there has been a recession from Q1 to Q3.  The conventional definition would deny that a recession has taken place.  

Also, should you use GDP or GDP per capita?  If you have rapid population growth, as Australia has had over the last five years because of very high immigration, GDP per capita has on occasion fallen when total GDP has risen.  To most people that will "feel like" a recession, though one might argue that it isn't.

You could use smoothed GDP, by for example fitting a moving average to the data, and then seeing whether the moving average has declined.  Or, as I tend to, you could examine 30 or 50 or 100 series and see how many are falling or rising.  If more than half are falling, it's a recession.  That is what my diffusion indices attempt to estimate.

I haven't updated my Oz coinciding index or diffusion indices—I need to update my data banks, and the way I feel right now, that's all too tedious—but I'm quite certain Australia is in a recession.  However, I'll update my data shortly, and then confirm the exact month I think it started.

Will Oz's recession last?

 I talked here about how all the various "PMI" surveys in Australia are falling, and how this prolly means that Australia is already in recession.

What I've done below is to combine all series into a single indicator.  You can see the plummet during COVID in 2020, the strong rebound after, and then a renewed plunge when there was a second lockdown in 2021.  Then the economy slowed as the rebound faded and as Australia's Central Bank, the Reserve Bank of Australia, tightened monetary policy.

We started a new recovery in 2024, but this faltered late last year as the RBA raised rates, and went into free fall with the Iran War.

The chart below shows the relationship between the economy (as represented by the combined PMIs) and the Reserve Bank's "cash rate".  Because I've plotted the RBA's cash rate (which is equivalent to the Fed Funds rate in Australia) inverted, when the blue line rises on the chart, the cash rate is falling on the chart, and when it falls, the cash rate is rising.  The two move in sync except for the COVID crash, when what economists call an "exogenous factor" caused the economy to plunge.  Note that interest rates aren't the only factor shifting the AU economy up or down.   For example, in 2019 (before COVID), the economy slowed because of a slowdown in the world economy.  A tentative recovery had begun, here and overseas, when COVID hit (January 2020).

So, if the RBA doesn't raise rates again, will the economy start to recover?  It's possible.  But remember, the world economy is likely to slow, even if there is a "ceasefire" in the Iran war.  A return to normal will take months, and uncertainty will continue to hamper those famous "animal spirits".  And some countries/regions, in particular, Europe and Indonesia, have already raised interest rates because of soaring inflation.  Indeed, the RBA may yet do the same thing as Australia's inflation accelerates.  And that will slow growth.

My best guess:  growth will slow further for a few more months.  Interestingly, all the growth in Q1 was from investment in AI data centres.  If that bubble bursts, we'll all be in serious trouble.

Happy days.

Oz recession is prolly already happening

 I haven't updated my Australian coinciding and leading indices, because I haven't updated my data banks.  But fortunately, the Australian Industry Group (AIG) and S&P Global have updated their "PMIs", and in the past these have correlated quite well with my coinciding index. The charts are shown below.  Clearly this is in part a response to the Gulf War, but it is also being driven by the RBA's interest rate increases.  

Australia slides into recession

 Just as is happening with the big 8 economies, the Australian services PMI is falling, though here, the manufacturing PMI is also falling.   There are plenty of anecdotal reports of plunging services:  declining visits to restaurants, slumping coffee sales, and so on.  Unemployment is rising, retail sales are sliding.

As usual, the Reserve Bank (RBA) has raised interest rates at precisely the wrong time, covering itself with glory yet again.  

The 2021 slump in the services PMI was caused by a Covid lockdown

 The chart below shows the S&P Global manufacturing PMI and the Australia Industry Group's survey (where I've adjusted the latest data to keep them comparable to the AI Group's historic data).   So, sliding into recession.  

No, the world economy isn't booming ...

 ... even though the manufacturing PMIs are up.

In the chart above, the dotted blue line, representing the big-8 manufacturing PMI, has jumped since the start of the Gulf War, while the services component (dotted red line) has plunged.  At first sight, the jump in manufacturing appears reassuring, but it is misleading.  In commentaries for individual countries, not just the big 8, but others, S&P Global, who calculate these indices, mention that many correspondents have increased stocks (inventories) to try and mitigate the rise in prices they think likely to happen.  In turn, this has led to increased orders and production--remember that everybody's spending is someone else's income.  But when prices have risen, there will no longer be the incentive to build up inventories.  Sales will drop, until inventories are once again in sync with demand and production.  De-stocking will occur, reducing output, sales and employment.

In contrast, services can't be stored in inventories.  You can't 'keep' a haircut or a meal in a restaurant or a holiday or an air trip.  You can't have a stack of services like these in a box in a warehouse.  And because people are directly, right now, feeling the effects of surging oil prices and increased uncertainty, they have cut back.  And until confidence is restored, that will continue.  As the dotted red line shows, services are already in trouble.

But confidence will be very hard to restore.  The US has shown that it does not care about the stability of the world economy or the oil market, and there is no obvious off-ramp for Trump and his haplessly amateur administration.   The oil market is in chaos, and very shortly demand destruction, that is, the reduction in GDP and spending and production to bring oil demand and supply into balance, will begin.  In the short term, oil demand is extremely inelastic, i.e., it is unresponsive to price.  In the longer term, of course, things will happen to shift the relationship between oil demand and GDP, such as switching to EVs for example, or making jet engines and aeroplanes more efficient.   But until those changes take effect, the only way to bring oil demand into balance with oil supply is to contract demand.  The longer the war lasts, the worse the downturn will be.  This is clearest in air transport, where a physical shortage of fuel will constrain the number of flights.  But it applies to road transport as well.  Also, how do people who drive to work by car cut their petrol use?  They can't, so they'll spend less on everything else.  Demand will fall as prices rise.

Economies take time to stop, and time to re-accelerate.  The services PMIs show an immediate response, which will spread into the rest of the economy, soon.

Every previous oil crisis has been followed by recessions.  This one will be no different, unless the war ends now.  And that seems extremely unlikely.

Feeble US recovery due to Trump

This chart shows the average of the PMI and ISM indices for the US (before 2011, it's the ISM alone), broken up into the services and the manufacturing sectors, and the average of the two, shown by the blue line.  (The relationship between the "whole-economy" PMI/ISM index and GDP is shown in the bottom chart, from 2000 to 2026, but I haven't updated the GDP data to include the latest release.)

After previous slowdowns or recessions, the rebound from the low point has been strong.  This time round it has been feeble.  Note how at the beginning of 2025, a strengthening recovery was aborted by Trump's tariffs.  Then, just as the economy started to pick up again, Trump's Iran war has caused a renewed downturn.  Now, so far, it's only one month of slowdown.  But if the Iran war and the oil blockade continue, which seems all too likely, this downtrend will continue.

The 1973 and 1979 oil crises produced deep recessions and strong inflation surges.  It looks as if this will happen again.

click to enlarge

Click to enlarge

Warning of world recession from PMI/ISM data

When economists first started analysing the business cycle, it was manufacturing* which led the cycle.  The interaction between stocks (inventories), investment, and production meant that this sector of the economy was proportionately more influential on the business cycle than services.  Manufacturing led; services followed.

But services have grown as a percentage of GDP, and even though services don't have an inventory problem (you can't store a haircut or a plane flight), they are in a way more vulnerable to shocks to confidence.  If you fear an impending recession, or a big fall in your income, both of which seem likely as the Iran war drags on, you can cut services immediately.  Don't go out for dinner, don't take a holiday, don't go to shows, have fewer haircuts, and so on.  Of course, you might also postpone buying a car or a house.

What we see in the big 8 (US, UK, Euro zone, China, Japan, Russia, India, Brazil) PMIs shows this split.  Manufacturing is finally recovering from the shock delivered to the system by Trump's tariff stupidities.  Even European manufacturing is now expanding (i.e., in this context, above the 50% "recession line").  Yet, the services PMI has plunged.  And the biggest falls are in the USA and the Euro zone.

If the Iran war is quickly resolved, with irreconcilable differences being papered over for now, it is probable that services could rebound as quickly as they did after Covid.  And a rapid, if short-lived, peace may lead to falling oil prices, which will ensure that Central Banks do not raise interest rates.  But a prolonged conflict will lead to a deep recession and, because inflation will remain high until well into the recession, CBs won't be able to cut rates.  The cut to oil supplies is much bigger than in the 1973 and 1979 oil crises, and those both led to deep recessions and strong inflation surges.

So, whether we get some sort of "peace" or not, is key to whether we enter a deep recession or just a small downward blip.  Trump wants an "off-ramp", of any kind, so my guess is that if Iran agrees to the nuclear deal it agreed to with Obama, and was about to agree to when the US attacked this time, he'll declare a victory and walk away.  But Iran will have demonstrated that it can choke off oil and gas supplies at the drop of a hat.  This is not a recipe for longer-term stability.  So we may see this futile war start and restart over the next while, like embers left over from a bushfire, which means stagflation is horribly likely.

* Actually, in the early 1800s, it was agriculture, because 90% of output and employment was in agriculture.  So what drove the business cycle was the 11-year sunspot cycle.  

Not the sort of recovery we like

 Three charts showing some time series from the US economy.

A low quit rate suggests workers have little confidence that they'll get a new job.
Low vacancies show they're right.

Jobs "hard to fill" from the NFIB small business survey
"Jobs plentiful" from the Conference Board consumer confidence survey

Consumer sentiment from the University of Michigan
Consumer confidence from the Conference Board

Another US indicator slides

 Another window into what's really happening in the economy is the relatively new logistics managers index.  The chart below shows a three-month moving average of the logistics index compared with the average of the extreme-adjusted manufacturing PMI and ISM.  The logistics index has been falling since February.

The conclusions are obvious.

Europe's PMI turns down

The dotted lines show the PMI indices for manufacturing/services for the Euro Area, each extreme-adjusted (by me) to remove "spikes".  The solid red line shows the average of the other two.  

Up to two months ago, the red line had been rising, pointing to an economic recovery.   Normally, manufacturing and construction lead services, and the manufacturing PMI has been falling, so the fall in the services PMI probably isn't a fluke, but a response to the downturn in manufacturing,

China's PMIs have picked up fractionally, but Europe's, the USA's, Brazil's and Canada's manufacturing PMIs are falling, with most other countries' going sideways.

Again, not recession, at least not yet, but clearly stagnation. 

 

Another leading indicator plunges

This has been a reliable leading indicator of the economy for nearly 60 years (see So, Happy Campers, a recession?)  Heavy truck sales are now almost as weak as during the Covid Crash or the 2000 recession, and clearly heading south.  

This shows the time series over just the last 4 years.  Note again the pattern which keeps on emerging---an incipient rise/levelling off at the end of 2024, and a subsequent renewed downturn in 2025.

Does this mean recession?  It's not inevitable.  But it certainly looks bad. 

The US economy hits the brakes

 Here's another indicator for the USA, showing how a recovery began, but has died.

The series depicted is my own US coinciding index, which is designed to coincide with the economic cycle.   You can see how growth slowed to the trough in 2023, started to pick up in 2024, and really accelerated in late 2024 and early 2025 before sliding again.  

Again, the slowdown up to 2023 was caused by the Fed raising rates, the recovery since then was caused by the diminishing impact of the rise in rates and the increasing impact of falling rates.  And the plunge since April is due to the uncertainty and damaging effect of Trump's tariffs and other policy initiatives.

US unemployment rate jumps

The BLS (Bureau of Labour Statistics) has produced new estimates for labour market data for November.  Because of the government close-down, there are no October numbers, so I have interpolated the gap.

This is the unemployment rate:

Observe how the unemployment was rising (in other words, the economy was weakening), then started to fall in the second half of 2024, before rebounding again after January.  The last time it was this high was in 2021 as the economy recovered from Covid.

If you take the change in the unemployment rate, it is strongly negatively correlated with the state of the economy: when the economy advances, the unemployment rate falls, and vice versa.  The chart below shows the change in the unemployment rate, inverted, so the line in the chart falls when unemployment is worsening, and rises when it is improving.  I have done this so it is consistent with the direction the overall economy is moving in.  

So, through 2023 and the first half of 2024, we can deduce that the economy was deteriorating, then it started to improve, before once again worsening after Trump's tariff débâcle. 

How does this look compared with a completely different indicator of the economy?  I have used the whole-economy ISM (service plus manufacturing) as a good proxy to the state of the economy, and put the change in the unemployment rate and the ISM on the same chart.   Note how the whole-economy ISM slightly leads the change in the unemployment rate.

The ISM has had a small rebound since June, but looks as if it might have peaked.  This means that the change in the unemployment rate might also have peaked, temporarily.  That does not mean that the unemployment rate will start falling--it may well just go sideways for a couple of months.

Indicator after indicator gives us the same pattern:  a nascent recovery as the economy shrugs off the previous rise in interest rates, and starts to respond to their fall; a recovery which aborts as Trump's tariff mess cuts economic activity and reduces confidence.

The chart below shows this pattern too.  It is my private sector data index, which I constructed when official government data were not being produced, but which I have found useful even now that data are being made available again.  The chart shows the year-on-year change in this index.  Note the peak in late 2024, and the slump since then.

The data are unambiguous:  the US economy is slowing.  Whether it goes back into recession isn't clear, but at the least there will be stagnation.   The markets are convinced that the Fed will cut rates again, which I think is very likely.  However, this market belief is not leading to falling bond yields and rising stock markets as it normally would, but instead to a falling US dollar and surging precious metal (gold, silver, platinum and palladium) prices, suggesting that the markets also think that inflation is going to be trending up.  In a word: stagflation.

World IP slides

This chart shows the six-month rate of change, at annual rates, for my index of world industrial production.  It's up to October.  Again, a simple pattern.  Recovery as the impact of rising interest rates diminishes, and is succeeded by the stimulus from falling interest rates.  And then growth peaks and slides sharply.

Trump is driving not just the US, but the global economy into a slowdown at best and a recession at worst. 

Economic growth is fizzling out

China has just released its official year-on-year industrial production growth rate for November (4.8%, down from a peak of 7.7 % in March).  November's data for US and EA (Euro Area*) industrial production are only available through October 2025.  I have a function which estimates additional month(s) of data for a time series.  It calculates the next month via three different techniques and uses the average of these three values as the forecast.  I have thus been able to estimate an average for industrial production for China, the US and the Euro Area through November.

The chart plots the 6-month rate of change at annual rates in the unweighted average.  These are the three largest economies/economic zones in the world, and allowing for Chinese overestimation of GDP, are roughly equal in size.  The 6-month rate of change is slowing for all three zones: China peaked in March 2025, and has been decelerating since; the US peaked in June this year; and the EA in April this year.

Growth for the average of the 3 is still positive, just, but the trend is down.  Note again the pattern:  an accelerating recovery in the world economy from Q4 2024, fizzling out as Trump's tariffs disrupt economies and increase uncertainty.  

How low can it go?  Well, there is the powerful (lagged) influence of falling interest rates, which should be holding the world economy up, offset by the more immediate impact of the increased uncertainty and trade reductions of the tariff war.  So we may see stagnation rather than recession.  

*EA = Euro Area/Euro Zone, i.e., the countries which have the Euro as their currency.

The coming AI crash

 From Owen Jones, talking to Professor Steve Keen, who correctly forecast the GFC.   He reckons the current AI boom will fizzle out within a year, to be followed by an AI bust as AI takes over more and more jobs.  He points out that a UBI will be essential, or people will starve to death, and there will be severe civil unrest, a dystopian "Hunger Games" scenario.  A new Great Depression, leading to massive economic and social change.

US leading indicators signal recession

For various reasons, I haven't calculated my US cyclical indices for a year or more.   But I've finally updated my US data banks and psyched myself up to do the calculations, so, here goes.

The chart below shows the year-on-year percentage change in my US coinciding and my US leading indices.  They are calculated from many underlying time series and are designed to remove some of the noise caused by the plethora of indicators which move in different directions each month, and that way to give clarity about the direction of the economy.

I have plotted my leading index with a 12-month lag.  This gives us an implicit forecast of the economy's direction over the next 12 months.  Observe how covid screwed up the lags, which is logical, because the covid crash and the recovery from covid were caused by exogenous influences, not by movements in the economy itself.

Note how the percentage change in my leading index is falling fast, suggesting that over the next 6-12 months the economy will be weak, or in recession.

The chart below compares my US coinciding index with my US diffusion index.  A diffusion index measures what percentage of a universe of monitored time series is rising.  In this case, the universe is 57 different time series, almost exclusively monthly.  When all are rising, the economy is strong.  When all are falling, it's in deep recession.  It's been smoothed using a 12-month centred moving average to iron out the monthly ebbs and flows.

It leads the cycle by about 5 months.  The unsmoothed diffusion index ticked up in November, but (a) that's based only on those data which were available, and (b) small blips in diffusion indices can be revised away as more data become available, and (c) it's just one month.  However, if this is the low for the diffusion index, it nevertheless indicates that, for at least the next 5 or 6 months, the US economy will be slowing.  

None of these indices gives pin-point timing or extent of the swings in the business cycle.  However, they do give strong rough indications of what's happening.  

My guess is that the US economy will be weak or even declining until the middle of next year.   But as I have said before, this is the first recession in my long professional experience caused by the extreme incompetence of the party and politicians in office, and by damaging policies, rather than by the strong ebbs and flows of the economy, so who knows?

US layoffs still trending up

The latest data from Challenger show that layoffs fell in November, after a spike in October.   These data are not seasonally adjusted, and also show large month to month "spikes".  So I have fitted a centred 5-month moving average to the data.  This moving average (see chart below) points to a big jump in layoffs after Trump's election, an improvement up to July and deterioration since then.   I have estimated a provisional seasonally-adjusted version of the Challenger layoff data, and it produces the same pattern.  [Why not a final seasonally adjusted series?  Because I want to run some statistical tests, to confirm seasonality, and it's late at night, so that will have to wait for tomorrow.  Meanwhile .....]

If you look at the average of the unadjusted data over the last 12 months, the last time layoffs were this high was during the Covid Crash, and the time before that was during the GFC in 2009!  

Don't be misled by one month's improvement.  The trend is still bad:  layoffs are rising, despite the apparent drop in November.

Note inverted scale for job cuts