Recent fears of a US recession have been fueled by a disappointing employment report, which triggered a sharp global market sell-off.
While markets have partially recovered, concerns about the economy’s trajectory persist.
However, experts suggest that these recession fears may be overstated.
Here’s a closer look at the current economic landscape and expert perspectives on the potential for a downturn.
Analyzing the jobs data
The latest US employment report has raised red flags, showing weak job growth and a slight increase in the unemployment rate.
Goldman Sachs, however, believes that the concerns may be exaggerated.
David Mericle, Chief US Economist at Goldman Sachs, attributes the job growth slowdown to temporary factors like weather-related absences and an uptick in temporary layoffs.
In the August 6 episode of Goldman Sachs Exchanges, Mericle emphasized that despite recent fluctuations, the overall trend suggests a steady job creation rate of about 150,000 per month.
He cautioned against overreacting to a single month’s data, noting that absent a significant economic shock, the current situation appears to be more of a “deceleration” rather than a full-blown recession.
Recession triggers remain absent
Historically, recessions have been triggered by specific economic shocks such as oil price spikes, asset market bubbles, or over-indebtedness.
According to Commerzbank, none of these triggers are currently present. Oil and natural gas prices have recently declined, and energy expenditures remain low compared to historical standards.
Regarding asset markets, while there have been recent corrections, stock markets remain near their highs, and real estate prices have risen over the past year.
The bank notes that a significant and sustained drop in asset prices would be required to trigger a recession, which seems unlikely at present.
On the debt front, household debt as a percentage of GDP has decreased from its peak in 2008 and now stands at 71%. Corporate debt, which rose during the COVID-19 pandemic, has stabilized at around 75% of GDP.
Commerzbank concludes that while some imbalances exist, they are not widespread enough to pose a significant threat to the overall economy.
Federal Reserve’s rate cuts: Overdue or not?
One factor contributing to market volatility is the belief that the Federal Reserve is behind the curve by not cutting rates at its July meeting.
Historically, US recessions have followed sharp interest rate hikes.
The Fed raised rates by 525 basis points between March 2022 and July 2023.
Chris Hyzy, Chief Investment Officer at Merrill and Bank of America Private Bank, suggests that the Fed is adjusting rates based on inflation and employment trends rather than recession fears.
He anticipates potential significant cuts soon, with futures markets indicating an 80% probability of a 50-basis-point cut in September.
Commerzbank points out that the real interest rate is currently above its neutral level, which could potentially trigger a recession.
However, similar conditions in 1984 and 1995 did not lead to recessions.
The bank also notes that monetary policy alone is insufficient to predict a recession; other factors such as long-term yields and asset prices also play a crucial role.
Expert consensus: Recession fears overstated
Overall, experts agree that while there are some warning signs, such as the Sahm rule indicator, a recession is unlikely.
Instead, the US economy is expected to grow at a slower pace than the long-term average in the coming quarters.
Favorable financing conditions and the likely moderation in interest rate cuts support this optimistic outlook.
Investors are advised to prepare for short-term market volatility, avoid reacting impulsively to headlines, maintain diversification, and view market weaknesses as opportunities to strategically enhance their portfolios.
While economic uncertainties persist, current data and expert analysis suggest that the fears of an imminent US recession may be overblown.
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