The investigation of the effect of hydration swelling on induced fracture generation and the resulted permeability in shale has considerably expanded in recent years. However, only a few experiments under anisotropic compressive stress conditions have been done in this area. The experiment methodology that was presented in this paper can be used to study the effect of hydration swelling on fracture initiation and propagation, and the change of shale permeability under anisotropic compressive stress conditions. An artificial fracture through a core was created before the test to simulate the hydraulic fracture generated during the fracturing process. Distilled water was used to simulate the hydraulic fracturing fluid. A CT scanner was used to collect the CT images of fracture development. A digital pressure transducer was used to monitor the upstream pressure change, and the downstream pressure was kept at atmosphere pressure. We, for the first time, combined water adsorption, stress anisotropy conditions, and shale permeability change into one test. Five tests were conducted: three tests underwent stress anisotropy, and the other two tests employed stress isotropy. These tests were continuously exposed to working fluids at a constant flow rate. From the results, the increase in the apparent weight of cores showed that water could be adsorbed into shale samples during the tests. In shale samples with stress anisotropy conditions, fractures through the core were generated. More fractures were created under larger differential stress conditions. The upstream pressure decreased when fractures through the core were generated or particle detachment happened. The decrease in pressure indicates that hydration may be beneficial to shale permeability recovery. To differentiate the effect of hydration and stress anisotropy on fracture generation, one sequential imbibition test was conducted (oil, then water). Fractures can be generated if the imbibition fluid changed from oil to water. The results supported the previous result that hydration may induce fractures (Liu and Sheng, 2019). The experimental results show that this methodology is a practical way to study the effect of hydration on shale properties in the process of hydraulic fracturing.