USA in Recession 2024: Yes or No?

Fitch Ratings recently downgraded the U.S. credit rating from AAA to AA+, citing concerns over governance and fiscal management. Concurrently, Goldman Sachs has increased the probability of a U.S. recession in 2024 from 15% to 25%, reflecting heightened economic risks.

US jobless data plunged, and with it, all the global markets fell due to weak confidence in the US markets. Japanese markets sent the shock-waves down the financial markets and the domino impact led to panic in Wall Street too. The question emerged, is the US in recession in 2024? Is there any scope of soft landing? What is the future of the US economy?

Current State of the US Economy

Economic Growth and GDP Trends

As of Q2 2024, the U.S. economy is experiencing a significant slowdown, with GDP growth registering a modest increase of just 0.9% annually, down from 2.1% in Q1 2024.

This deceleration reflects mounting challenges across several sectors:

• Consumer Spending: Despite inflation easing to 3.0% in June 2024 from its peak in 2022, consumer spending has stagnated, growing at a mere 0.5% annually. High interest rates and cautious consumer sentiment are contributing factors.
• Corporate Investment: Business investments have also tapered off, with nonresidential fixed investment increasing by only 1.2%, compared to 2.8% in the previous quarter. Sectors like manufacturing and construction have seen reduced activity, reflecting broader economic concerns.
• Government Spending: While federal government expenditures have seen a slight uptick, driven by defense spending, state and local government spending remains subdued, contributing minimally to GDP growth.

Inflation, Interest Rates, and Fed Policy

Inflation has been a critical concern, though recent data suggests a moderation. The Consumer Price Index (CPI) for July 2024 showed a 3.2% year-over-year increase, down from 4.1% in May. The Federal Reserve’s aggressive rate hikes in 2023 and early 2024 have begun to take effect, though at the cost of economic momentum.

• Federal Funds Rate: The Federal Reserve has maintained the federal funds rate at 5.25% since July 2024, signaling a cautious approach as it monitors the economic impact of previous rate hikes.
• Wage Growth: Average hourly earnings have grown by 3.6% year-over-year, a slowdown from the 4.1% observed in June, indicating that wage pressures may be easing, aligning with the Fed’s inflation target of 2%.
• Monetary Policy Outlook: The Fed has indicated that further rate cuts could be on the table if economic data continues to soften, particularly if GDP growth falters further or unemployment rises more sharply.

These trends reflect a U.S. economy in a delicate balance, with growth slowing under the weight of tightening monetary policy, even as inflationary pressures begin to ease. The economic landscape is increasingly characterized by cautious spending, restrained investment, and a Federal Reserve poised for potential policy shifts.

US Labor Market Challenges and Jobless Rates

Job Report Analysis

In July 2024, the U.S. labor market displayed signs of strain, with the unemployment rate ticking up to 4.1%, a noticeable increase from 3.7% in June.

This rise can be attributed to several factors:

• Corporate Layoffs: A significant contributor was the wave of corporate layoffs across the technology and manufacturing sectors, driven by cost-cutting measures amid economic uncertainty.
• Tight Monetary Policy: The Federal Reserve’s stringent interest rate policies have made borrowing more expensive, leading to reduced business investment and, subsequently, workforce reductions.
• Sectoral Shifts: Industries such as retail and hospitality, which had rebounded strongly post-pandemic, are now seeing a slowdown, adding to the job losses.

These developments fueled recession fears, causing a spike in market volatility as investors grew increasingly concerned about the broader economic impact. However, by early August, markets began to stabilize, and jobless claims slightly receded, hinting at potential resilience in the labor market.

Impact on Consumer Confidence

The rise in unemployment has had a direct impact on consumer confidence. The University of Michigan’s Consumer Sentiment Index dropped to 62.8 in July, down from 66.0 in June. This decline reflects growing concerns among consumers about job security and economic stability, leading to reduced household spending. As consumer spending accounts for nearly 70% of U.S. GDP, this drop in confidence further exacerbates fears of a recession.

Sahm Rule and Its Implications

The Sahm Rule, named after economist Claudia Sahm, is a key indicator used to predict the onset of a recession. It signals a recession when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more relative to its lowest point in the previous 12 months.

• Current Status: As of August 2024, the Sahm Rule has not yet triggered, though it is edging closer as unemployment rises. The increase in jobless rates by 0.4 percentage points over the past three months is concerning, but it hasn’t yet crossed the 0.5 percentage point threshold.
• Implications: If the Sahm Rule is triggered, it would formally indicate that the U.S. economy has entered a recession, aligning with the broader market concerns and investor sentiment observed in recent weeks.

The current labor market dynamics underscore the fragility of the U.S. economic recovery, with rising jobless rates and declining consumer confidence heightening the risk of a recession. While markets have shown some resilience, the path ahead remains uncertain, particularly if unemployment continues to climb and the Sahm Rule is ultimately triggered.

Global Economic Impact and Market Reactions

Asian and European Market Turmoil

In August 2024, global markets faced significant volatility, with Asian and European markets bearing the brunt. The Japanese stock market experienced a dramatic crash, losing over 10% in a single day, which sent shock-waves through other Asian markets.

This sharp decline was triggered by a combination of factors:

• Weak Economic Data: Reports of slower-than-expected growth in China and Japan fuelled investor concerns about the region’s economic stability. China’s real estate market, in particular, continued to show signs of distress, contributing to broader market fears.
• Geopolitical Tensions: Ongoing geopolitical conflicts, especially the prolonged Russia-Ukraine war and the escalating tensions in the Middle East, added to the uncertainty, leading investors to retreat from riskier assets.

In Europe, the ongoing recession in the UK, exacerbated by persistent inflation and weak consumer spending, further dampened market sentiment. The broader European markets followed suit, with major indices like the FTSE 100 and DAX 30 showing significant declines.

Wall Street and Global Stock Markets

The U.S. stock market mirrored the global trend, with major indices experiencing substantial losses. The S&P 500 and NASDAQ saw declines of 4% and 5%, respectively, in early August, driven by a mix of domestic and international factors:

• Tech Sector Sell-Off: Leading the downturn was a sell-off in technology stocks, particularly among large-cap companies like Apple and Microsoft. Investor concerns about slowing growth in the tech sector and the broader economy contributed to this trend.
• Investor Sentiment: The VIX, often referred to as the “fear index,” surged to 55, reflecting heightened market anxiety. This spike in volatility underscores the fragility of investor confidence amid growing fears of a global recession.

However, by mid-August, there were signs of market stabilization as investors adjusted to the new economic realities. While uncertainty remains high, the initial panic appears to be subsiding, with markets finding some footing after the initial shock.

Impact on Global Trade and Commodities

The turbulence in global markets has had a direct impact on trade and commodity prices.

Key developments include:

• Oil Prices: Crude oil prices surged above $90 per barrel, driven by concerns over supply disruptions due to geopolitical tensions, particularly in the Middle East. This spike adds inflationary pressure to the global economy, exacerbating existing challenges.
• Supply Chain Disruptions: Global supply chains, already strained by the pandemic and geopolitical conflicts, faced further disruptions. The slowdown in Asian manufacturing, particularly in China, has led to delays and increased costs for goods worldwide.

These factors collectively contribute to a challenging global economic environment, where the interplay of market reactions, US political environment, geopolitical tensions, and trade disruptions is creating significant headwinds for economic recovery.

What is the Probability of the US Slipping into Recession?

As we navigate the uncertainties of 2024, the probability of the U.S. slipping into a recession has become a hot topic among investors and economists. The economic landscape is complex, with mixed signals complicating the outlook.

While some economic indicators—like rising unemployment and slowing GDP growth—suggest increased recession risks, it’s important to remember that the economy has shown resilience in the past. The Federal Reserve’s policies are designed to curb inflation without triggering a downturn, but the balance is delicate.

For investors, the key is to stay informed and adaptable. The possibility of a recession isn’t certain, but it’s prudent to prepare for volatility. For economists, the data demands close scrutiny, as even small shifts in unemployment or consumer confidence could tip the scales.

In essence, while the probability of a recession in the U.S. has risen, it’s not a foregone conclusion. Keeping a close eye on the economic indicators and adjusting strategies accordingly will be crucial in navigating the months ahead.

Can the USA Avoid Recession in 2024?

The question on many minds is whether the U.S. can sidestep a recession in 2024. While challenges abound, there are silver linings that suggest a soft landing—or even avoiding a recession—might be possible.

Silver Linings:

• Resilient Consumer Spending: Despite economic headwinds, consumer spending remains relatively strong, particularly in sectors like travel and leisure, indicating underlying economic strength.
• Labor Market Flexibility: Although unemployment has risen slightly, job creation continues, especially in healthcare and tech, which could cushion the economy.
• Federal Reserve’s Cautious Approach: The Fed’s willingness to adjust interest rates based on incoming data suggests that monetary policy could pivot if signs of recession become more pronounced.

Positive Economic Indicators:

• Inflation Moderation: With inflation easing, there’s less pressure on consumers, which could sustain spending and economic growth.
• Corporate Earnings: Some sectors, particularly technology and healthcare, are reporting better-than-expected earnings, which could bolster investor confidence and stabilize markets.

While the risks of a recession in 2024 are real, these silver linings and positive indicators provide hope that the U.S. could either avoid a recession altogether or experience a more manageable economic slowdown.

Conclusion

In 2024, the U.S. economy faces a precarious situation with rising recession risks, highlighted by a Fitch Ratings downgrade and Goldman Sachs upping recession odds from 15% to 25%. Despite these challenges, resilient consumer spending and easing inflation offer potential for a soft landing.