Recently, concerns about a potential recession in the US have led to significant declines in equity markets. Major stock indexes, including the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite, have all experienced sharp drops.
On a Monday (5th August), US equity markets took a significant hit. The Dow Jones Industrial Average fell by 986.88 points, or 2.48%, ending at 38,750.38. The S&P 500 decreased by 152.23 points, or 2.85%, to 5,194.33, while the Nasdaq Composite dropped by 563.51 points, or 3.36%, settling at 16,212.65. These declines reflect growing investor anxiety about the possibility of a recession.
What Is Fuelling Recession Fears?
Several factors contribute to the growing fear of a recession. One major concern is the recent geopolitical tension in the Middle East and the unwinding of the Yen carry trade, which have added to market volatility. Traditionally, a recession is defined by two consecutive quarters of negative Gross Domestic Product (GDP) growth. According to the National Bureau of Economic Research, a recession involves a significant and widespread decline in economic activity lasting more than a few months.
Recent economic data has intensified these fears. On Friday, job growth data revealed that the US added only 114,000 non-farm jobs in July, significantly lower than the expected 175,000. This figure is also below the 200,000 jobs needed to keep up with population growth. Additionally, the unemployment rate rose to 4.3%, approaching a three-year high.
This slowdown in the labour market is primarily due to reduced hiring rather than increased lay-offs. The Federal Reserve’s interest rate hikes in 2022 and 2023 have dampened demand, contributing to slower job growth.
Although wage growth remains above the Fed’s 2% inflation target, the weak employment report has strengthened the case for a potential rate cut in September. Despite these concerns, job reductions continue in both the US and Canada, although recession fears seem to be subsiding slightly.
Should You Be Concerned About a Recession?
Whether you should be worried about a possible US recession depends on various factors. An official has suggested that a recession could be a more pressing concern than geopolitical issues, though it may still be too early to make definitive conclusions.
The US remains a significant market for India, with the US being India’s largest export destination, accounting for nearly 18% of India’s merchandise shipments in FY24.
Despite weaker-than-expected job data, the US economy does not appear to be in recession, according to Chicago Fed Bank President Austan Goolsbee. He emphasised that while the data might not suggest overheating in the economy, the Federal Reserve needs to carefully monitor the situation to avoid being overly restrictive with interest rates.
Goldman Sachs has revised its forecast for a US recession, increasing the probability to 25% from a previous estimate of 15%. However, the firm remains optimistic, anticipating that job growth will improve in August and that the Federal Reserve might respond with a 25 basis points rate cut.
Goldman Sachs economists believe that while there are risks, job openings and overall economic stability suggest that a severe downturn is unlikely. The Federal Reserve has the flexibility to adjust interest rates if needed.
DBS Bank’s chief economist, Taimur Baig, has downplayed recent data, suggesting it may not be as alarming as it seems. He pointed out that the US GDP for Q2 exceeded expectations and that rising unemployment is partly due to more Americans re-entering the workforce. Baig also noted positive economic data from Asia, which could indicate a strong month ahead.
Conversely, Nomura has adopted a more cautious approach. They describe the recent data as “noisy” and suggest that while Federal Reserve Chair Jerome Powell has become more comfortable with the inflation outlook, there are concerns about the labour market. Nomura now expects the Federal Reserve to cut rates by 75 basis points this year, with reductions of 25 basis points in September, November, and December.
What Lies Ahead for the Federal Reserve?
The Federal Reserve’s next meeting on interest rates is scheduled for September. Chairman Jerome Powell has indicated that a rate cut could be on the table, depending on the data and overall economic outlook. The decision will hinge on whether the data support a reduction in rates to balance inflation control and employment levels.
The recent rise in unemployment and a decline in the ISM manufacturing index to 46.8% have raised concerns about economic contraction. Additionally, the 10-year Treasury yield has fallen below 4% for the first time since February 2024, reflecting market uncertainty.
The current economic indicators present a mixed picture. While there are signs of economic strain, including weaker job growth and rising unemployment, there is also optimism that the economy may stabilise. The Federal Reserve is expected to respond to these challenges with a cautious approach to interest rates.
For now, while it is wise to stay informed and prepared, outright panic may be premature. Monitoring further economic data and the Federal Reserve’s actions will provide clearer insights into whether a recession is imminent or if the economy will manage to recover and grow.
