By Ann Saphir and Dan Burns
(Reuters) – An unexpectedly weak U.S. employment report, that includes a post-pandemic excessive within the jobless charge, has rekindled worries a recession could also be within the offing that may sprint the Federal Reserve’s hoped-for gentle touchdown for the economic system.
With inventory markets reeling on the premise the Fed has now saved rates of interest too excessive for too lengthy, a Goldilocks consequence narrative that had continued for months has all of a sudden been overrun by indignant bears.
So simply what’s the state of play within the U.S. economic system? It’s uncommon that anyone knowledge level captures all that’s at play, however here’s a take a look at a clutch of indicators – some nonetheless favorable to ongoing progress and no recession, others maybe not.
GROWTH AND DEMAND
Most recessions happen as a result of total financial output, also referred to as gross home product, falls notably. That has not occurred and doesn’t appear to be it’ll imminently.
Progress within the second quarter got here in at 2.8% on an annualized foundation, double the speed of the primary quarter, precisely the typical of the final six quarters, and on par with the typical progress charge over the three years earlier than the pandemic.
Whereas the combo of progress is altering, one measure that Fed Chair Jerome Powell tracks as a gauge of underlying private-sector demand – last gross sales to personal home purchasers – held at 2.6% within the second quarter. Once more that’s proper on its common of the final yr and a half and matches the run charge as much as the pandemic.
SERVICES SECTOR STRENGTH
The Institute for Provide Administration’s intently watched providers exercise index climbed again into enlargement territory and measures of recent orders and employment each rebounded.
A rival measure of providers exercise, accounting for two-thirds of U.S. financial exercise, from S&P International held close to the very best in additional than two years in July.
“The July … surveys are indicative of the economic system persevering with to develop at the beginning of the third quarter at a charge corresponding to GDP rising at a strong annualized 2.2% tempo,” according to Chris Williamson, chief business economist at S&P Global Market Intelligence.
INFLATION COOLING
The reason interest rates remain so high is that inflation surged in 2021 and 2022 and has been slower to fall than it was to rise. The year began with an unexpected upturn in inflation that gave the Fed pause about pivoting to rate cuts.
More recent data, though, show it coming closer to the Fed’s targeted 2% level, which should allow rate cuts to begin soon. The question many investors have is did the Fed wait too long to shift its focus from inflation to jobs.
JOB MARKET SIGNALS RECESSION?
U.S. employers have slowed hiring, adding an average of about 170,000 jobs each month for the last three months, and just 114,000 in July, versus 267,000 a month in the first quarter of 2024, and 251,000 last year.
Meanwhile the unemployment rate rose in July for a fourth straight month, to 4.3%, nearly a full percentage-point above its January 2023 low and the highest since October 2021.
Once the unemployment rate heads upward with that kind of momentum, it does not typically stabilize until the Fed cuts interest rates.
The historical relationship between a rise in the unemployment rate and an economic downturn is captured by the so-called Sahm rule that says a recession is underway when the three-month moving average of the unemployment rate rises half a percentage point above its low from the previous 12 months.
To date, the rule has never been wrong.
Claudia Sahm, the economist who defined the rule that bears her name, told Bloomberg TV on Monday she believes the economy is probably not currently in a recession, but “we’re getting uncomfortably shut.”
DELINQUENCIES ON THE RISE
The U.S. household debt delinquency rate rose to 3.2% in the first quarter versus 3.1% in the final three months of last year, according to the New York Fed. That is well below the 4.7% seen at the end of 2019, just before the COVID-19 pandemic.
But New York Fed researchers also found among credit-card borrowers who have reached their borrowing limits – this group tends to be disproportionately younger and lower-income – delinquency rates have risen dramatically.
Analysts say strains felt by low-income households can ripple through the economy. The New York Fed releases second-quarter data on Tuesday.
DOWNSIDE SURPRISES
Incoming reports on the economy have tended to fall short of economists’ forecasts in the last several months, with Friday’s weak employment data only the latest example.
Citigroup’s “Shock Index” has only been around for about two decades, so it does not have an established track record for being predictive of recessions, but it can say a lot about the change in investors’ faith in the Fed being able to deliver the soft landing for the economy.
The index is near a two-year low.
WHAT CAN BE DONE?
The 2020 pandemic recession triggered an all-out response from fiscal and monetary authorities, with the Fed slashing interest rates to zero and buying trillions of dollars in bonds to ease financial conditions, and Congress and two successive presidential administrations pushing through trillions of dollars of spending to bolster consumers and businesses.
This time around would likely look quite different, and not just because the recession, if that is what this turns out to be, looks far smaller than the massive hole blown in the U.S. and world economy by the COVID-19 shutdowns.
The Fed’s coverage charge is presently within the 5.25%-5.5% vary, giving it way more room to chop borrowing prices than it had in March 2020, when the benchmark charge was within the 1.50%-1.75% vary.
And on the fiscal aspect, excessive U.S. authorities debt ranges might stop a sturdy stimulative response from the present or subsequent presidential administration.
