The U.S. economy is showing signs of strain, raising concerns about a potential recession. The primary driver of these fears is the recent employment data. In July, U.S. employers created only 114,000 jobs, well below the expected 175,000 new roles.
There are two explanations as to why job growth has declined and why unemployment has risen for the month of July… #Bidenomics & #Kamalanomics.
Republicans want to add jobs, lower costs for the American people, & strengthen our economy. https://t.co/7hDmRNpTqz
— Rep. Carol Miller (@RepCarolMiller) August 6, 2024
The unemployment rate also rose to 4.3%, a near three-year high. This increase in the unemployment rate triggered the “Sahm rule,” named after American economist Claudia Sahm.
“However, for some, talk of an economic slowdown – or even a (whisper it) recession – is a little premature.” https://t.co/GIiuirZbhJ
— Dori Toribio (@DoriToribio) August 5, 2024
The rule suggests that if the average unemployment rate over three months is half a percentage point higher than the lowest level over the past 12 months, the country is likely at the beginning of a recession.
Instead of spurring growth & creating jobs, President Biden and VP Harris have hampered businesses with over $1.6 trillion dollars in new regulations that hurt our economy. I will keep pushing back against duplicative over-regulation! https://t.co/0Qe6f5IWIZ
— Gus Bilirakis (@RepGusBilirakis) August 6, 2024
The U.S. Federal Reserve held borrowing costs last week, but its chair, Jerome Powell, indicated that a rate cut in September is possible. This led to speculation that the Fed might have waited too long to take action. A cut in interest rates typically makes borrowing cheaper, which should boost the economy.
However, if the jobs figures suggest that the economy is already tipping downwards, the fear is that the Fed’s actions may be too late. The technology sector has also experienced significant turmoil. The long-running rally in tech shares, fueled in part by optimism over artificial intelligence (AI), took a hit when chip-making giant Intel announced it was cutting 15,000 jobs.
Market rumors suggested that rival Nvidia might delay the release of its new AI chip, triggering a 10% plunge in the Nasdaq, the technology-heavy U.S. index, which contributed to the overall market panic.
Tech sector turmoil impacts markets
If stock market panic persists and shares continue to fall, the Fed might intervene before its next scheduled meeting in September and cut interest rates.
This could happen if there’s “a market dislocation that deepens and starts to threaten systemically important institutions and/or broader financial stability,” according to Neil Shearing, group chief economist at Capital Economics. Despite these concerns, some experts argue that the situation isn’t as dire as it seems. Claudia Sahm herself told CNBC, “We are not in a recession now,” although she added that “the momentum is in that direction.” She highlighted that a recession is not inevitable and there is substantial scope to reduce interest rates.
Neil Shearing also noted that while the report was bad, it wasn’t catastrophic. He suggested that Hurricane Beryl might have contributed to the weakness in July’s payrolls figure. Other data painted a picture of a labor market that is cooling but not collapsing.
He added that there appeared to be “no increase in firings,” while a “modest” decline in average weekly hours worked in July “does not scream ‘recession’.”
Simon French, chief economist and head of research at Panmure Liberum, advised caution. “Stepping back, have we suddenly re-appraised the health of the world’s biggest economy? No and nor should we.” However, he acknowledged that it is another concerning data point at a time when liquidity is thin, and there are multiple worries.
In summary, the U.S. economy shows signs of strain, particularly with disappointing jobs data and volatility in the tech sector. However, the situation is nuanced, and a recession is not yet a foregone conclusion. The coming weeks will be critical in determining whether these fears will materialize or if the economy can stabilize through effective policy measures.
