Is the United States Heading for a Recession? | Business and Economic News

The unexpected rise in the US unemployment rate has divided economists: is the US on the brink of a recession or not?

The unemployment rate hit a nearly three-year high of 4.3% in July, data showed Friday, up from 4.1% in June and a five-decade low of 3.4% in April last year, making it more likely than ever that the Federal Reserve will cut interest rates when it meets again in September.

Which raises the question: is it too late?

The rising unemployment rate points to a recession in 2025, Gary Clyde Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, told Al Jazeera. I expect that [US] The Fed will begin cutting its benchmark rate in September and continue to cut at subsequent meetings. That response is likely to lead to a shallow recession, he added.

Stock markets also reacted on fears of a recession. The Dow Jones Industrial Average fell more than 700 points, or nearly 2 percent, on Friday afternoon, and the S&P 500 index fell 2 percent, as Wall Street banks called for deeper and more rate cuts than previously expected.

Economists at Goldman Sachs and Citigroup, among others, have raised their rate cut forecasts by half a percentage point in September and November, and by a quarter point in December.

This follows a week of weak data, including a slowdown in manufacturing activity and negative sentiment on jobs, indicating a downward trend in the economy.

This does not signal a recession

But not everyone agrees with this scenario.

“We don’t expect a recession, even though the stock market is behaving today as if it is anticipating a recession,” Nancy Vanden Houten, chief economist at Oxford Economics, told Al Jazeera.

The jobs report was certainly weaker than most economists expected and didn't dismiss signs of a weaker labor market, but there are things going on beneath the surface that need to be considered when looking at Friday's data, Vanden Houten said.

Economists say the data shows the Federal Reserve's efforts to slow the economy are working. [File: Lindsey Nicholson/UCG/Universal Images Group via Getty Images]

On the one hand, there are many more people looking for work: about 420,000 people entered the job market last month. These are new immigrants joining the workforce, which is a good thing, Vanden Houten stressed.

Additionally, the jobs survey saw a sharp increase in the number of people reporting temporary unemployment or not working due to bad weather, referring to the work slowdown in Texas due to Hurricane Beryl last month.

The number of people reporting they missed work in July because of bad weather was higher than in any non-winter month since September 2017, when the effects of hurricanes Harvey, Irma and Maria were hitting the southeastern United States, said Matt Colyar, associate director at Moodys Analytics.

“It just proves that what the Federal Reserve wanted to do, slow down the economy, slow down employment so people aren't constantly changing jobs and getting 8 to 10 percent raises, is happening. It doesn't mean a recession,” Colyar told Al Jazeera.

Additionally, the last pre-pandemic recession had other catalysts for the downturn, including very high household debt and mortgages that homeowners couldn't keep up with, a situation that doesn't exist now, Vanden Houten explained.

But the data has sparked talk of the so-called Sahm rule. Former Federal Reserve economist Claudia Sahm invented a measure that looks at how quickly the unemployment rate is rising to determine whether it's a sign of a recession.

But Sahm herself doubts that a recession is imminent, even if Sahm's regime were on the verge of triggering one.

For now, Vanden Houten and Colyar are sticking to their previous rate cut forecasts: a quarter-point cut in September and another in December.

“It's going to take more than one bad jobs report for me to say that the recession they've been waiting for every day is finally here,” Colyar said.

For now, all eyes are on next month’s jobs report for a clearer picture of the labor market and the U.S. economy. Until then, economists like Colyar will be tracking weekly jobless claims to get a sense of the situation on the ground, he said.

However, the latest data will have an influence on the upcoming presidential elections.

Former President Donald Trump's campaign said Friday that the jobs report was further evidence that the Biden-Harris economy is failing Americans, the Associated Press reported.

Any slowdown in the economy will backfire on the incumbent president, Vanden Houten said. Even though President Joe Biden is no longer in the running, Vice President Kamala Harris is part of Team Biden and this could have a negative impact on her, Vanden Houten said.

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