The global sell-off in equities that began on Friday and ran into this week was triggered by concerns over the healthof the US economy, including a weaker than expected jobs report.
Stock prices plummeted as investors heaped blame on the US Federal Reserve for keeping interest rates too high, at between 5.25 to 5.5%, even as signs of a cooling economy grew.
But most economists believe the US will still achieve a so-called soft landing, with inflation falling back to the Fed’s 2% goal without a sharp rise in unemployment.
“Other than the unemployment rate, almost every real economy indicator is growing, some of them going strongly,” said Jason Furman, a former White House economist, now a professor at Harvard.
“Anyone who is confident that we’re going into recession is dramatically overstating how much we understand about the economy,” he added.
Friday’s jobs report included the fourth consecutive monthly increase in the unemployment rate, to 4.3%.
It followed lacklustre results from companies including McDonald’s and Diageo suggesting weakness in the US consumer.
The figures have prompted some analysts to worry that the US could fall into a recession deep enough to throw the world economy off course.
“Once you start to worry about recession, you are usually in a recession,” said Andrew Hollenhorst, economist at Citi.
“Once you see the unemployment rate rise, in past economic cycles, that’s always been the stage when you begin to see temporary lay-offs become permanent ones.”
Despite recent sharemarket volatility, most economists believe the US will still achieve a so-called soft landing. Photo / Eduardo Munoz Alvarez, Getty Images, File
So far, rate-setters have remained calm. Chicago Fed president and FOMC member Austan Goolsbee quipped on Monday that the stock market “has a lot more volatility” than the US central bank.
Nevertheless, markets are pricing in four or five quarter-point US interest rate cuts this year, compared with three before last week’s jobs data.
“If you’re sitting at the FOMC, the risk of action versus inaction has fundamentally shifted,” said Adam Posen, president of the Peterson Institute for International Economics think-tank.
Yet economists believe the recent data is less worrying than the naysayers think, arguing that the evidence suggested the US was still close to full employment.
“114,000 jobs is exactly the amount that the United States needs to keep up with labour supply,” said Ernie Tedeschi, a former chief economist on the White House’s Council of Economic Advisors and now a professor at Yale, quoting the headline non-farm payrolls figure for July.
“It was not a weak report, it was a trend report,” he added. “[But] when you are at full employment, you have nowhere else to go but down.”
Fed officials have also noted that the unemployment figure remains low by historical standards.
San Francisco Fed President Mary Daly said on Monday that many details in the jobs data left “a little more room for confidence that we’re slowing but not falling off a cliff”.
Goolsbee said that while the non-farm payrolls number was weaker than expected, the economic picture was “not looking yet like recession”.
Another concern is whether US consumers can continue driving growth if unemployment is rising and savings built up during the pandemic are dwindling.
Delinquency rates on car loans and credit cards have risen, especially among lower-income households. But they are not yet at the sort of levels associated with the 2008 financial crisis, according to data from the New York Fed.
“As the consumer goes, so goes the US economy,” said Ryan Sweet, chief US economist at Oxford Economics.
“In aggregate, the consumer is in pretty good shape, but there’s pockets of weakness, particularly low and mid-income households.”
Others note that since the pain is being felt most by the poorest households, it may not be enough to knock the entire US economy off course.
“Do the hardest-hit have enough spending power to drag down the entire economy? The answer is: Not really,” said Philipp Carlsson-Szlezak, global chief economist at BCG.
Discounting by retail giants like Walmart and Target could also keep shoppers spending, analysts say.
“Consumers are getting a bit extra purchasing power,” said Paul Christopher, economist at Wells Fargo. “Even if their credit cards are at, or near, capacity.”
Written by: Claire Jones and Delphine Strauss in London and Martha Muir in Washington
