- Why the U.S. Is Avoiding Recession Fear
When global stock markets experienced a "black Monday" on August 5th, with plunges not seen in years, a factor emerged in many explanations as a possible cause: a looming US recession. Goldman Sachs raised the likelihood of such a scenario from 15 to 25 percent, while analysts at Wells Fargo spoke of an "economic slowdown".
Of course, Donald Trump couldn't be missing: The Republican presidential candidate warned on his social network, Truth Social, that if his opponent Kamala Harris were elected, a "Kamala Crash and a great depression in 2024" would threaten.
At first glance, these reactions seemed odd: The US economy grew unexpectedly strongly by 2.8 percent in the second quarter of 2024, despite the central bank's tough stance against inflation. The number of industrial jobs has risen sharply and stabilized at a high level. And Americans spent significantly more on goods and services in the second quarter than at the beginning of the year.
However, even if markets recovered and the main reason for the crash was likely the change in the interest rate differential between Japan and the US, the risks for the US economy are not to be dismissed. The country has left behind a historical low phase with an unemployment rate of under four percent, but that ended in May. In fact, the value has been slowly but steadily increasing since then. Whether the low number of jobs added in July was just a statistical outlier remains to be seen - but the value was enough to unsettle a number of market participants.
Further negative signals followed: The Institute for Supply Management's index of industrial activity fell to its lowest level since November 2023. And the mood of American consumers, measured by a team from the University of Michigan, has been declining for several months.
But does all this really point to a looming recession? So far, most professional observers are dismissive. Holger Schmieding, chief economist of Berenberg Bank, speaks of "good macroeconomic data" and expects US economic growth of 2.5 percent in 2024. And even at Goldman Sachs, the institution now predicting a higher recession probability, they point out that the risk is "limited". "In the big picture", the US economy "looks good", writes a team led by economist Jan Hatzius.
When will interest rates fall?
Whether this will continue to be the case could depend on a rate cut by the US Federal Reserve. For months, attention has been focused on when the Fed will lower its current policy rate of 5.25 to 5.5 percent and thus provide support to the US economy. The central bankers had previously avoided this, also with an eye on the persistently high inflation rate of over three percent. However, the problem now seems to be contained, and a value below the three percent mark could be reached again soon.
Paul Krugman, a star economist close to the ruling Democrats, wrote in his column in the "New York Times": "It's already clear that the Fed made a mistake by not cutting rates last week. In fact, they probably should have started doing so months ago." The Nobel laureate in economics compared the US economy to a patient diagnosed with diabetes risk. The bad news: Doctors see sufficient warning signs for an impending illness. The good news: There's still time to do something about it.
The global stock market turmoil and the predictions of economic analysts, such as Goldman Sachs increasing the likelihood of a US recession from 15 to 25%, indicate potential economic challenges ahead. Despite the strong economic growth in the second quarter of 2024, the signs of a slow increase in unemployment rates and a decline in consumer mood could point towards a looming recession.
