Is the US Truly Facing a Recession?
In recent days, global stock markets have experienced significant downturns. Trading screens in the US, Asia, and parts of Europe have been flooded with red numbers trending downward. This shift has heightened fears about a potential slowdown in the US economy, the world’s largest. Experts attribute this anxiety primarily to disappointing US jobs data for July, released last Friday.
Some believe, however, that discussions of an economic downturn—or even the dreaded word “recession”—are premature. So, what exactly do the official figures reveal? As is often the case with economics, the news is mixed.
Let’s start with the bad news. US employers added only 114,000 jobs in July, falling short of the anticipated 175,000 new positions. The unemployment rate also climbed to 4.3%, a nearly three-year high, triggering the “Sahm rule.” Named after economist Claudia Sahm, this rule posits that if the three-month average unemployment rate is half a percentage point higher than the lowest rate over the past year, the country may be on the brink of a recession. In July, the US unemployment rate rose, bringing the three-month average to 4.1%, compared to the 3.5% low of the past year.
Adding to these concerns, the US Federal Reserve decided not to cut interest rates last week. Other central banks in developed economies, like the Bank of England and the European Central Bank, have recently lowered rates. Although Fed Chair Jerome Powell hinted at a possible rate cut in September, there is speculation that the Fed might have waited too long. Lower interest rates make borrowing cheaper, which can boost the economy. If the jobs data indicates an economic downturn, the fear is that the Fed’s delayed action might be insufficient.
Compounding these issues are the challenges faced by technology companies. A long-running rally in tech shares, partly driven by AI optimism, recently hit a snag. Intel announced it would cut 15,000 jobs, and rumors suggested Nvidia might delay its new AI chip release. This led to a sharp 10% drop in the Nasdaq, the tech-heavy US index, last Friday, further fueling market fears.
Neil Shearing, group chief economist at Capital Economics, noted that if the stock market panic continues, the Fed might intervene before its next meeting in September with an emergency rate cut. This intervention could occur if market instability threatens major financial institutions or broader financial stability.
Despite these concerns, there is some good news. Claudia Sahm herself stated on CNBC that “we are not in a recession now,” although she acknowledged that momentum is moving in that direction. She emphasized that a recession is not inevitable and that there is considerable room to lower interest rates.
Opinions on the jobs data are mixed. Neil Shearing pointed out that while the report was bad, it wasn’t catastrophic. He suggested that Hurricane Beryl might have contributed to the weak July payroll numbers. Other data indicated a cooling labor market, but not a collapsing one, with no noticeable increase in firings and only a modest decline in average weekly hours worked.
Simon French, chief economist at Panmure Liberum, advised a measured response. He argued that while the jobs data is concerning, it doesn’t necessitate a complete reassessment of the US economy’s health. He added that it is merely another data point in a period marked by thin liquidity and multiple concerns.
In summary, while there are signs of economic strain, the situation remains complex and multifaceted. A recession is not a foregone conclusion, and there are still tools available to mitigate these economic challenges.
