Economics Update August 2024 - US recession likely, but not yet certain

The recent slump on the stock markets has brought a topic into focus that was almost completely ignored on the capital markets for a long time: the possibility of an imminent recession in the US economy. In view of the strong tightening of monetary policy by the US Federal Reserve since March 2022, this scenario is actually obvious. After all, higher interest rates slow down overall economic demand. So far, however, the Fed's restrictive monetary policy, implemented to curb inflation, has not weakened the economy. On the one hand, this was due to surplus savings from the times of the coronavirus pandemic, which private consumption was able to draw on for a long time. Secondly, the US labor market showed considerable distortions - also as a result of the pandemic. As a result, the weaker demand for labor was not reflected in an increase in the unemployment rate. The expansive fiscal policy and, in particular, the high incentives for investment in "green" technologies were additional factors stimulating the economy.

Rising unemployment in the USA

The situation has now changed in recent months: Since March, the unemployment rate has risen four times in a row by a total of 0.5 percentage points. Together with a falling number of job vacancies, higher initial and follow-up applications for unemployment benefits and slower wage growth, this certainly points to an impending recession. However, the findings are not certain: the persistently low level of redundancies is striking. The rise in the unemployment rate is therefore primarily due to the fact that the number of jobseekers continues to rise, but companies are hiring fewer and fewer new employees. The rise in unemployment is likely to continue, but could be slower overall than in previous economic cycles.

Private consumption still robust so far

The expected consequence would in any case be weaker consumption growth. Households' surplus savings have now largely been used up and the savings rate has fallen to a low level of less than 3.5%. In addition, the risk of losing one's job and not finding a new one immediately has increased. This should lead to more retirement savings. So far, however, private consumption has remained largely stable. It remains to be seen how quickly this will change. Weaker demand from households would in turn have a negative impact on the labor market. This would inevitably bring an economic downturn closer. Given the lack of serious imbalances in the economy as a whole, this recession is likely to be moderate. However, this would still be bad news for the already weakening European economy.

Interest rate cuts have a delayed effect

The belief that the Fed could halt such a recession with its interest rate cuts starting in September is unrealistic: firstly, because of the time lag of at least half a year before monetary policy takes effect and, secondly, because of the limited scope of interest rate cuts in an environment in which inflation is still above the 2% mark. It is unlikely that the Fed will focus exclusively on the employment target and risk a rebound in inflation with drastic interest rate cuts in the shortest possible time. It is therefore time to prepare for a renewed slowdown in global economic momentum due to a US recession.