US Recession: Economy Slowdown Fears as Grim Jobs Outlook Prompts Market Plunge— Did Fed Miss Key Red Flags?

Key Takeaways

• Fed kept rates unchanged, but they are still high. 
• U.S. investors and consumers are worried about a possible recession.
• Do their fears have a basis?

In the turmoil of the global economy, the Federal Reserve‘s decisions on interest rates hold profound implications for American consumers and the overall economic sentiment. As the central bank pursues higher rates and a longer-tack strategy, the effects are beginning to ripple through the financial well-being and perceptions of individuals and households.

This move is not without its complexities, as it balances the goals of curbing inflation and maintaining a robust economy while influencing how Americans perceive their financial prospects. But is a recession going to hit the U.S. economy, or is the worst behind us?

Market Collapses On Economy Slowdown Fears

Global stock markets experienced a significant sell-off on Friday as weak U.S. jobs growth  fueled fears of a sudden economic downturn. The tech-heavy Nasdaq index  fell over 2.4%, with Intel and Amazon declining after disappointing earnings reports.

Data revealed that employers added only 114,000 jobs in July, much lower than expected, while the unemployment rate reached its highest level in nearly three years. This suggested an end to the long-running U.S. jobs boom and spurred speculation about potential Federal Reserve interest rate cuts.

The global equities market also dropped on Monday, Aug. 5. Japan’s Nikkei fell by more than 12%, recording its worst one-day performance since 1987. The crash trickled down to other main Asian and European stock markets, including London’s FTSE 100, which lost 1.9% on Monday morning; Paris’ CAC 40, which dropped by 2.2%; Milan’s FTSE Mib, which dipped by 2.8%; and Frankfurt’s DAX 40 which decreased by 2.6%.

Additionally, the fear gauge, the CBOE Volatility Index (VIX) , spiked 26% to above 23, the highest level seen since March 2023.

Fed Kept Rates Unchanged

On July 31, the Federal Reserve decided to keep interest rates unchanged for the eighth consecutive meeting, emphasizing the need for “greater confidence” that inflation is heading towards its target before considering any rate cuts.

After its two-day meeting, the U.S. central bank unanimously voted to maintain the federal funds rate range at 5.25% to 5.50%. This rate has been steady since July 2023, when the Fed last raised it to its highest level in over two decades.

The Federal Open Market Committee (FOMC) noted that although inflation has decreased over the past year, it remains somewhat elevated.

“In recent months, there has been some further progress toward the Committee’s 2% inflation objective,” the FOMC’s statement  highlighted, marking a slight change from its previous description of progress as “modest.”

Did Powell & Co. Missed Their Chance?

Global markets plummeted in the wake of the Federal Reserve’s decision to keep interest rates steady, with equities experiencing a sharp decline on Friday and Monday. U.S. economic data wasn’t flattering either, falling far from expectations.

This has raised fresh concerns about the central bank’s strategy, prompting many to wonder if it has missed a crucial opportunity to stimulate the slowing economy.

Rumors are circulating that the Federal Reserve will call an emergency meeting with all members later this week to address the collapse of the Japanese yen and the broader market fallout from the Fed’s latest policy decision. If true, this would suggest that the central bank is reevaluating its stance in response to mounting economic uncertainty.

What Is a Recession?

A recession is a significant decline in economic activity that lasts for an extended period, typically defined as two consecutive quarters (or six months) of negative economic growth. During a recession, various economic indicators, such as Gross Domestic Product (GDP) , employment, consumer spending, and investment, show a decline. Recessions can have a wide-ranging impact on the economy, leading to increased unemployment, reduced consumer and business confidence, and financial market instability.

Some key characteristics and causes of recessions include:

Reduced Economic Growth: Recessions are marked by a decrease in overall economic output, as measured by GDP. This often means that the economy is producing fewer goods and services.

Rising Unemployment: Job losses and unemployment are expected during recessions as businesses cut back on hiring or lay off workers to reduce costs.

Declining Consumer Spending: During a recession, consumers tend to spend less as they become more cautious about their financial well-being.

Reduced Business Investment: Businesses may delay or cancel investment projects during a recession due to uncertainty about future demand and economic conditions.

Financial Market Turmoil: Recessions can lead to instability in financial markets, causing stock market declines, reduced lending by banks, and concerns about the stability of financial institutions.

Reduced Government Revenue: Governments often experience decreased tax revenue during a recession due to lower economic activity, impacting their ability to fund public services.

Recessions can be triggered by various factors, including financial crises, external shocks (like oil price spikes or global events), excessive debt, and more. To manage and mitigate the impact of recessions, governments and central banks often implement economic policies, such as fiscal stimulus and monetary easing, to stimulate economic growth and stabilize the financial system.

The specific definition of a recession, as well as its causes and consequences, can vary from one economic cycle to another, and they are typically determined by economic researchers and organizations like the National Bureau of Economic Research (NBER) in the United States.

U.S. Recession History

The United States has a rich history of economic cycles, including periods of economic growth and, unfortunately, recessions. These economic downturns have significantly impacted the country’s financial well-being, job markets, and overall prosperity. Here’s a brief overview of some key moments in U.S. recession history:

The Great Depression (1929-1933)

The Great Depression  was one of U.S. history’s most famous and severe economic downturns. It was triggered by the stock market crash 1929 and was characterized by widespread bank failures, massive unemployment, and a general collapse of the economy. The Depression lasted for about four years and profoundly impacted American society, leading to significant government intervention in the economy.

The 1970s Recession (1973-1975)

This Recession was primarily driven by a combination of factors, including high oil prices due to the OPEC oil embargo, inflation, and the end of the post-World War II economic boom. It led to a significant rise in unemployment and stagflation, a combination of stagnant economic growth and high inflation.

The Early 1980s Recession (1980-1981)

This Recession was brought on by Federal Reserve policies to curb high inflation. It resulted in a severe economic downturn, followed by robust growth in the mid-1980s.

The Early 1990s Recession (1990-1991)

This Recession was partly due to the savings and loan crisis and a weakening real estate market. It led to increased unemployment and a slow recovery.

The Dot-Com Bubble Burst and 9/11 Recession (2001)

The bursting of the dot-com bubble and the 9/11 terrorist attacks contributed to a brief recession. The Federal Reserve implemented monetary policy to stimulate the economy, and a recovery followed.

The Great Recession (2007-2009)

This was one of the most recent and significant economic downturns. It was triggered by the collapse of the subprime mortgage market and the subsequent financial crisis. The housing market crash, widespread bank failures, and a global credit crunch resulted in a deep and prolonged recession. It took several years for the U.S. economy to recover fully.

The COVID-19 Pandemic Recession (2020)

The COVID-19 pandemic led to a sudden and severe economic downturn. Businesses shut down, travel was restricted, and lockdowns were implemented to curb the spread of the virus. During this crisis, the U.S. government implemented significant fiscal stimulus measures to support the economy.

These are just a few of the notable recessions in U.S. history. Recessions are a natural part of the economic cycle and can vary in their causes and impacts. The government, central banks, and policymakers often respond with various financial tools to mitigate the effects of recessions and promote recovery.

Is the U.S. in a Recession Now?

While there is no universally accepted definition, a standard benchmark for identifying a recession is two consecutive quarters of contracting gross domestic product (GDP).

As of the second quarter of 2023, GDP showed a growth rate of 2.1%, and the Atlanta GDPNow model currently projects robust growth at a 5.4% pace for the third quarter. According to this widely used metric, there are no indications of an impending recession.

The National Bureau of Economic Research (NBER) is the official authority for declaring U.S. recessions. The NBER’s definition of a recession is somewhat broad: “a significant decline in economic activity that is spread across the economy and endures for more than a few months.”

At the time of writing, U.S. businesses are continuing to hire, and consumers are actively spending. September saw an impressive addition of 336,000 jobs, which is not typical during a U.S. recession. While the September job growth exceeded analysts’ expectations, overall job growth has noticeably decelerated over the past year.

Is the U.S. Economy Likely to Have a Recession?

Investors are growing more confident in the U.S. economy’s ability to avoid a recession in the coming months. A ‘soft landing,’ representing the ideal balance between curbing inflation and sustaining economic growth, is now within reach.

Nonetheless, lingering concerns cast a shadow over this optimistic scenario. Despite a prolonged trend of declining inflation, interest rates have reached their highest levels in two decades, and several economic indicators suggest that the economy might not be entirely out of the woods regarding the threat of a recession.

According to the New York Fed‘s recession probability indicator, there is still a 56% chance of a U.S. recession within the next 12 months, though this is down from the 66% reading in August. Other reliable indicators send cautionary signals suggesting a potential economic downturn: job data displays inconsistency, the yield curve remains inverted, and experts hold divided opinions on whether a recession might have been postponed rather than completely prevented.

While the Federal Reserve has persistently cautioned that its ongoing series of rate hikes will decelerate economic growth, the most recent economic projections no longer foresee a recession. Nevertheless, even as the risk of a recession recedes, interest rates are expected to remain elevated for an extended period, which calls for investors to maintain a prudent stance in the market.

No Need To Panic

Even if the U.S. does encounter a recession in the remaining months of 2023 or early 2024, investors do not need to succumb to panic.

Historically, recessions have been relatively short. Since World War II, the average duration of a U.S. recession is just 11.1 months. The early 2020 Covid-19 Recession, for instance, lasted only two months.

Recessions are not uncommon occurrences. On average, there has been approximately one U.S. recession every five years since World War II.

Recessions have historically presented excellent buying opportunities for long-term investors. While timing the market’s bottom perfectly can be challenging, the S&P 500 has generated an average return of 40% in the 12 months following the lowest point of a U.S. recession.

Certain stocks even have a track record of performing well during recessions. Notably, shares of companies such as Target (TGT), Walmart, and Home Depot (H.D.) significantly outperformed the S&P 500 during the 2020 and 2008 recessions.

U.S. Economic Forecast for 2024

The Conference Board anticipates a potential economic downturn in the United States in the early part of the year. This projection suggests a brief and shallow recession, influenced by several key factors. These factors include persistently high inflation, elevated interest rates, a reduction in pandemic-related savings, a rise in consumer debt, decreased government spending, and the resumption of mandatory student loan repayments. C.B.’s forecast indicates that real GDP growth will reach 2.2% in 2023 before decelerating to 0.8% in 2024.

Maintaining Resilient Consumer Spending

Despite grappling with elevated inflation and increased interest rates this year, U.S. consumer spending has shown remarkable resilience. However, this trend may not be sustainable. With stagnant growth in real disposable personal income, diminishing pandemic-related savings, and escalating household debt, the outlook for consumer spending growth is for a slowdown towards the end of this year, with contractions anticipated in Q1 2024 and Q2 2024. As inflation and interest rates stabilize later in 2024, a revival in consumption may occur.

Business Investment and Economic Conditions

Following subdued growth in Q1 2023, business investment rebounded in Q2 2023 despite the upward trajectory of interest rates. This resurgence results from increased business spending on equipment, especially computing and transportation equipment, and elevated investments in structures, particularly within the manufacturing sector.

However, analysts anticipate this trend will gradually reverse as U.S. consumption softens and interest rates climb. Analysts expect one more 25-basis-point rate increase by the Federal Reserve this year, likely in November. Residential investment, which has already seen a significant contraction, may stabilize later in the year and experience growth in 2024, supported by lower interest rates and strong demand.

Government Spending and Fiscal Considerations

In 2023, government spending was a notable driver of economic growth, driven by federal non-defense spending related to infrastructure investment legislation passed in 2021 and 2022. However, the implementation of discretionary outlay reductions, as outlined in the Fiscal Responsibility Act designed to avert the debt ceiling crisis (totaling $1.5 trillion over ten years), will constrain overall government spending and exert a dampening effect on growth in the latter part of this year and early next year.

Navigating the Inflation Landscape

Inflation remains a key concern, with expectations of uneven progress in the coming quarters. Energy prices have risen in recent years, boosted by geopolitical conflicts. However, analysts expect the cooling of rental prices. This previously made a significant contribution to inflation and had a positive impact on inflation data.

Labor Market Dynamics

While labor market tightness has persisted, analysts expect it to moderate over the coming quarters. However, compared to previous economic downturns, experts anticipate the labor market will remain relatively robust due to ongoing labor shortages in specific sectors and retention practices in others. This resilience should prevent a significant economic contraction and pave the way for a rebound in the following year.

Future Outlook and Stability

Looking ahead to late 2024, we anticipate a reduction in the economic volatility that has characterized the U.S. economy during the pandemic. In the latter half of 2024, analysts expect overall growth to return to more stable pre-pandemic rates. Inflation may increase to 2%, and the Federal Reserve will likely lower rates to approximately 4%. However, challenges in the labor market may persist due to an aging workforce, presenting an ongoing challenge for the foreseeable future.”

U.S. Economic Forecast for 2025 and Beyond

About the Author

Giuseppe Ciccomascolo

Giuseppe Ciccomascolo began his career as an investigative journalist in Italy, where he contributed to both local and national newspapers, focusing on various financial sectors. Upon relocating to London, he worked as an analyst for Fitch's CapitalStructure and later as a Senior Reporter for Alliance News. In 2017, Giuseppe transitioned to covering cryptocurrency-related news, producing documentaries and articles on Bitcoin and other emerging digital currencies. He also played a pivotal role in establishing the academy for a cryptocurrency exchange website. Crypto remained his primary area of interest throughout his tenure as a writer for ThirdFloor.

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