With the latest jobs report showing slightly weaker results than expected, the recession chatter has intensified. Economists are quick to say, “Don’t panic, it’s not a recession, at least not yet.” But is this really the case?
Let’s break down why the recession debate is heating up and why it might be overblown.
The Current Economic Snapshot: Not a Recession Yet
Joe Biden’s presidency has seen record job growth. Despite July’s job numbers falling short of forecasts—114,000 new jobs versus an anticipated 175,000—the overall employment trend remains positive. Importantly, job creation has not turned negative, which is often a recession signal.
According to the formal definition, we are not near a recession. Yet, discussions of a downturn have gained momentum. This stems from the “Sahm Rule,” a recession predictor that has historically been reliable. It measures the acceleration in unemployment rates, which have risen from 3.4% to 4.3% recently.
Even Claudia Sahm, the rule’s creator, isn’t convinced we’re in a recession. In an interview with Yahoo Finance on August 2, she stated, “Do I think we are in a recession right now? No. We have a really healthy economy; it’s just not pointed in a good direction.”
Market Reactions and Shifting Narratives
Investor reactions have been dramatic. The stock market dropped nearly 2% following the job report, with the S&P 500 down 5.7% from its mid-July peak. The Nasdaq has also faced a 10% drop and entered correction territory. The VIX volatility index has surged to 29, its highest in almost two years.
What’s driving these fluctuations? It’s a shift in economic outlook. For most of the past year, inflation was easing while spending and hiring remained strong. This led many to believe the Federal Reserve could achieve a “soft landing” by raising interest rates to curb inflation without inducing a recession.
However, doubts are surfacing. Capital Economics flagged labor market cracks as a risk factor for a “hard landing.” Their analysis, released on August 2, highlighted weak job numbers, rising unemployment claims, and a manufacturing slowdown as red flags for the economy.
Fed Rate Cuts and Economic Uncertainty
The recent economic indicators suggest a potential shift in the Fed’s strategy. Rate cuts, anticipated to begin in September, might occur more aggressively if signs of economic weakness persist. The big question is whether the Fed has delayed too long and might inadvertently trigger a recession.
Despite the current economic jitters, several recession indicators have proven unreliable in recent years. For instance:
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Inverted Yield Curve: Historically a strong recession predictor, it has been inverted for two years without a recession occurring. Bloomberg’s 2022 prediction of a 100% chance of recession turned out to be incorrect.
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Negative GDP Growth: There were two consecutive months of negative GDP growth in early 2022 with no ensuing recession.
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Leading Economic Indicators: These have frequently signaled a downturn without materialising into a full-blown recession.
The stock market’s recent drop may be a necessary correction after a strong rally since October 2022. Stocks were potentially overvalued, and a market dip alone isn’t sufficient to signal a recession.
Inflation and Future Prospects
The good news is that inflation seems to be fading. Robin Brooks, economist at the Brookings Institution, noted on August 2 that “inflation is now truly yesterday’s story.” President Biden highlighted job creation in his latest statement, but inflation remains a concern for many voters, particularly with high costs of living.
The real challenge for Kamala Harris, as she prepares for a potential presidential run, will be managing voter perceptions of inflation. If Harris can avoid missteps, inflation might not be a significant issue for her, especially if it remains subdued.
Conclusion: Navigating Economic Uncertainty
The current discussion about a recession might be overblown. The economic indicators are mixed, and while some suggest potential weaknesses, many traditional recession signs have been misleading in recent years. The stock market may be correcting from overvaluation, but this alone doesn’t signal a recession.
For now, it appears that inflation is under control, and the Federal Reserve still has the tools to manage economic stability. The real task ahead is navigating the evolving economic landscape and maintaining confidence in the recovery.
Stay tuned as we continue to monitor the latest developments in Bidenomics and how they impact the broader economic picture.
