U.S. Economy Slows: Is a Recession Imminent?

 

After a year of unexpectedly strong growth, the U.S. economy is beginning to show signs of slowing down. The July jobs report revealed softer-than-expected figures, with the unemployment rate rising for the fourth consecutive month. This has led to a market sell-off and increased concerns that a recession may be on the horizon.

In response to these recent developments, J.P. Morgan Research has raised the likelihood of a U.S. and global recession occurring before the end of 2024 to 35%, up from 25% in their mid-year outlook. This shift reflects growing uncertainties in economic indicators, as key aspects of the growth forecast are being challenged.

Slower Labor Demand and Weakening Global Manufacturing

Bruce Kasman, Chief Global Economist at J.P. Morgan, noted that recent data points to a sharper-than-expected weakening in labor demand, with early signs of job shedding emerging. Business surveys also suggest a slowdown in global manufacturing and in the Eurozone—regions that were expected to support global expansion this year.

Despite these troubling signals, Kasman emphasized that the overall economy is still showing strength, particularly in the service sector. The solid gains in this area are helping to temper the impact of weaknesses elsewhere. However, he pointed out that the usual recession vulnerabilities, such as sustained profit margin compression, stress in credit markets, and shocks in energy or financial markets, are notably absent at the moment.

Modest Increase in Recession Risk

As a result, J.P. Morgan's assessment of the near-term recession risk has only been modestly raised to 35%. Looking ahead to the end of 2025, the probability of a recession remains unchanged at 45%. Kasman acknowledged the added uncertainties surrounding political factors but maintained that the outlook for a recession by the end of next year has not shifted significantly.

Inflation Cooling and Fed's Rate Outlook

On a more optimistic note, inflation is gradually coming down. As a result, J.P. Morgan now sees a 30% chance that the Federal Reserve will continue with its "high-for-long" interest rate policy, a drop from 50% two months ago.

Kasman explained that the modest increase in recession risk contrasts with a more substantial shift in the outlook for interest rates. The change is largely driven by shifts in growth and inflation risks, which are challenging the gradual approach to interest rate adjustments that the Fed had previously adhered to.

The U.S. has seen a significant slowdown in wage inflation compared to other developed markets, and unit labor costs have aligned with the Fed's inflation target. This easing of labor market conditions suggests that the Fed's current policy stance is restrictive, which has led J.P. Morgan to expect a rate cut of at least 100 basis points by the end of the year.

U.S.-Centric Inflation Risks and Global Policy Divergence

However, these anticipated rate cuts in the U.S. may not be mirrored globally. Kasman noted that the risk shift surrounding inflation is largely U.S.-centric, and the pass-through of U.S. policy changes to other economies is limited unless there is a broader synchronization in macroeconomic fundamentals and financial markets. As such, the Fed's shift away from gradualism may not be reflected in the monetary policies of other central banks.

What’s Next for the Economy?

While the outlook remains uncertain, one thing is clear: the U.S. economy is at a crossroads. The chances of a recession in the near term have increased, but significant risks remain absent, and certain sectors, like services, continue to perform well. The Fed’s stance on interest rates is likely to shift, with potential rate cuts on the horizon. However, the global economic landscape may not follow the same path, as inflation risks and central bank policies diverge from country to country.

As the economy continues to navigate these turbulent waters, businesses and consumers alike will need to stay vigilant and adapt to an evolving economic environment. The next few months will be crucial in determining whether the U.S. can weather this slowdown without tipping into a full-blown recession.