Global stocks plunged over the weekend on fears of a weakening US economy, and on Monday, all three major US stock indexes were down significantly.
The Dow Jones Industrial Average fell Over 1,000 pointsWhile both the S&P 500 and Nasdaq were down more than 3 percent — the S&P 550’s marked Biggest drop in one day From September 2022. The slides came after Japan’s Nikkei index The worst day since the “Black Monday” crash of 198712.4 percent decrease, and as European market Struggled as well.
Signals of heavy losses that investors are following Report last week showed the US added just 114,000 jobs in July, down from nearly 150,000, and unemployment rose to 4.3 percent – higher than in any month since October 2021. These numbers aren’t a crisis in and of themselves: the unemployment rate is still relatively low, and the weak hiring performance isn’t catastrophic, but both are taken as signs that the U.S. economy may be showing some cracks.
Although many economists Estimates that the United States will avoid a recession After the pandemic-induced economic downturn, and despite doing so, the reports rekindled concerns that a US recession could still happen, wreaking catastrophic potential effects on the global economy. On Monday, Goldman Sachs raised the possibility of a recession starting next year 15 percent to 25 percent.
It is impossible to say how realistic these recession fears are now. But it may be too early to panic. The US economy isn’t just supposed to be good—it’s actually in pretty good shape.
“There’s definitely some slowdown going on,” said Matt Collier, an economist at Moody’s Analytics. “But the key things that have made us relatively buoyant about the U.S. economy — those things haven’t changed.”
A recession coming?
Collier said the rise in unemployment “scares a lot of people,” because it’s known as the “coalition law,” clearly signaling that a recession may be around the corner. The rule is activated if the three-month average unemployment rate rises by at least half a percentage point from the previous year’s low. It has successfully predicted every US recession since the 1970s.
However, the economist after whom the rule is named, Claudia Sahm, is not convinced that the Sahm rule will make a reliable prediction this time. The post-pandemic economy has so far defied other historical recession indicators: For example, most bond strategists surveyed by Reuters earlier this year said the patterns they study were so unusual that they And the bond yield curve is not considered Be prophetic
“If the rule of thumb is triggered, it will join the growing index group, the rules of thumb, which were not meant to function,” Saham told AP Before the jobs report came out last week.
One reason the Sahm rule may not work this time is that the increase in unemployment is not being driven by layoffs but by more people entering the labor force. Strong growth in the labor supply doesn’t necessarily signal a recession, Collier said.
“[Unemployment] Can keep growing,” he said. “But so far, the labor market isn’t turning red as much as it’s slowing down.”
But a bad jobs report isn’t the only thing that shuts down sales in global markets; so called carry on business can also play a big role. Investors in this business borrow money at low interest rates – such as the Japanese yen or Swiss franc – and use it to buy high-yielding investments such as US Treasury bonds.
Because there is yen The price rose 11 percent against the US dollar In a month, these businesses are no longer profitable for investors. While it’s hard to tell for sure in real-time, Collier said investors “could be unwinding those bets to cut their losses” and instead putting that money into safe havens like U.S. bonds, which contributed to the crash in the Nikkei index.
Goldman Sachs cautions against reading too much into recent market volatility. In its analysis on Monday, the bank said it sees recession risks as “limited” that it “does not see major fiscal imbalances” and that although it raised its projection on recession risks, there is plenty of room for the Federal Reserve to step in to protect the economy.
The Fed is expected to cut interest rates as early as its September meeting — or, unusually, Maybe even before that – and it will provide relief for borrowers and businesses. Now that inflation has come down Close to the Fed’s 2 percent target rate, Moody’s analysts are projecting two rate cuts before the end of the year in September and December, involving a gradual easing of high interest rates. This could go a long way to calm the stock market.
“Households are in good shape and businesses continue to hire strongly. And businesses and households have managed their debt relatively well,” Collier said. “So we think that [the Fed] Can unwind the policy relatively slowly. … There is some evidence that there is more resilience than previously assumed.”
