Last Friday, August 2, the United States Department of Labor reported an increase of 114 thousand jobs in the non-agricultural payroll for July, a figure significantly lower than the 176 thousand positions expected by the consensus of analysts. Likewise, the figures for the previous months were revised downwards by around 100 thousand jobs. There is indeed a weakening of the North American labor market: between January and July of this year, where the increase in the non-agricultural payroll (1.42 million jobs) was lower than that reported for the same period in 2023 (1.92 million).
On Monday, August 5, markets fell sharply due to expectations of an economic recession in the United States that was triggered by weak employment data. In addition, it was discounted with a high probability that the cut in the reference interest rate of the Federal Reserve (Fed) this coming September will be 50 basis points (bp) and not 25 bp as expected a week ago.
In this author’s view, investors have probably overreacted strongly. There is no reason to believe that employment will fall in the coming months. Even less so given that the Fed’s most recent monetary policy statement emphasized an unemployment rate that, while it has increased, remains low (4.3 percent).
The weakening of the labor market does NOT imply that the US economy will fall into recession as the market expects. It only implies that growth could be more moderate – and slightly positive – during the next few quarters. Private consumption, the main bastion of growth for the US economy, could continue to grow – especially in the services sector, a boost that has been confirmed by the non-manufacturing ISM – thanks to the expansion of employment and solid household wealth (real estate properties, financial instruments and pension funds, among other assets). Also, the fact that the Fed is beginning to lower its reference interest rate this year opens up space for economic activity to be reactivated starting in 2025.
In addition, the main recession indicators do not suggest that the economy in general will fall in the next twelve months. The index of leading indicators, one of the main recession indices in the United States, registers annual rates that are increasingly less negative. Other indicators have not registered the critical levels consistent with past recessions either. In fact, the probability of a recession calculated by Goldman Sachs rose from 15% to 25% after Friday’s employment data. And this same institution assures that, although there is a change in trend in the labor market, at no time is a fall in activity in general anticipated. In a press conference, the president of the Fed asserted last week that the American economy remains strong despite the period of deceleration it is going through.
In the INVEX Analysis Department, we will monitor the most relevant indicators to determine to what extent the growth of the United States GDP could slow down, which for now we anticipate at 2.1% for 2024 and 1.5% for 2025. We maintain the expectation that the United States will avoid a recession, especially if the central bank begins a rate-cutting cycle next month. In fact, we reiterate the expectation of a 25 bp cut in the target range of the federal funds rate at the meeting on September 18 and not 50 bp as the market estimates today.
The overreaction is likely to pass, especially if the data confirm that the economy is not that weak. On the other hand, we do not rule out a fall in activity if the markets reinforce the idea of a recession in an unfounded and constant manner, as they are doing now. There is concern that by insisting so much, the markets will discourage production plans or payroll expansion among companies in all economic sectors.
