What caused the sell off? From Wednesday 31 July to Monday 5 August, the S&P 500—the primary U.S. stock index—fell by around 6%. The selloff was driven by a weaker-than-expected July jobs report, which showed a slump in payroll gains and a rise in unemployment. This fed into other warning signs such as rising delinquency rates on car loans and credit cards, fanning fears of a slowdown—and even outright recession—in the United States.
Is the U.S. economy headed for recession? Our Consensus is currently for U.S. economic activity growth to slow from its Q2 level in the second half of this year, but our panelists do not see the U.S. in recession in the period. Of the 30 panelists we poll, only two see a contraction at present. Growth should be broad-based: Private spending, public spending, fixed investment and exports are all seen rising over July–December. What’s more, the U.S. is expected to be the G7’s top economic performer over 2024 and 2025.
Key downside risks to watch: Though the U.S. economy should steer clear of a recession, numerous risks could cause it to underperform expectations. An escalation of conflicts in the Middle East and Europe could raise prices for energy and agricultural goods, forcing the Fed to keep interest rates higher for longer. A much larger fall in U.S. stock markets—perhaps linked to tempered optimism over the potential of AI—would reduce household wealth and could translate into reduced private spending, particularly given most of the American population is invested in stocks. If Trump gets into office, large tariff hikes and a crackdown on immigration will increase prices and hamper firms. And any direct U.S. involvement in overseas conflicts—such as in the case of a hypothetical Chinese invasion of Taiwan—could cause economic confidence to crash.
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Insight from our analyst network
On the latest labor market data, Nomura analysts said:
“Beyond the headline miss on non-farm payrolls and the unemployment rate, there were concerning signs of job losses in the household survey. Gross flows data indicated a sharp increase in the percentage of workers becoming unemployed this month. There was also a rise in short-duration (<5 week) unemployment. Rising job losses tend to coincide with the beginning of labor market downturns. Until July, the rise in the unemployment rate was mainly driven by a slowdown in hiring and rising labor force participation – consistent with some normalization from the overheated labor market of 2021-22. Job losses are a more alarming driver of weakness, which increased recession concerns in financial markets.”
ING’s James Knightley commented on the monetary policy outlook:
“We have long been in the camp expecting the Fed to be more responsive to a cooling economy, resulting in more rate cuts than both the Fed and the market were anticipating. For now we are sticking with our three 25bp cut view for this year, but the risks do increasingly appear to be skewed to more aggressive action, especially in early 2025 we suspect.”
Our latest analysis
Hong Kong’s economy accelerated in Q2, though private spending was a weak spot.
Korea slipped into a surprise contraction in the second quarter amid lower household consumption.