According to a report by J.P. Morgan, the unexpected strong growth of the US economy over the past year has now shown signs of slowing down. The July employment report fell below expectations, with the unemployment rate rising for the fourth consecutive month. This has led to a significant stock market downturn in August, raising concerns about whether the US is on the brink of a recession.
Based on the latest economic conditions, J.P. Morgan’s research department estimates a 35% possibility of a US and global economic recession by the end of 2024, up 10% from earlier this year. Bruce Kasman, Chief Economist of J.P. Morgan, stated that the slowdown in labor demand has exceeded expectations, with early signs of labor force attrition. The latest business surveys also indicate a loss of growth momentum in global manufacturing and Europe, while the service sector continues to show steady growth.
Kasman noted that the US economy does not currently face issues such as a reduction in corporate profit margins, credit market pressures, or impacts from energy and financial market disruptions. Therefore, the risk of an imminent recession has only been slightly raised to 35%.
As of now, J.P. Morgan maintains a 45% chance of an economic recession in 2025. The US unemployment rate has triggered the Sahm rule, which is when the 3-month moving average of the unemployment rate is more than 0.5% higher than the low point of the previous 12 months, signaling an impending recession. Since 1970, this rule has successfully predicted every economic downturn in the US.
Historically, during economic recessions, there have been significant declines in the US stock market. The most severe decline occurred during the recession in 2008, with the market dropping by 55%, while the smallest drop was seen during the 1980 recession at 16%.
However, Claudia Sahm, the economist who proposed the Sahm rule, believes that the situation has changed significantly post-pandemic and the current US economy is not in a recession. She emphasizes that the rising unemployment rate is a warning sign, indicating the proximity of a potential economic downturn, but it is not inevitable.
Furthermore, the phenomenon of “inverted yield curve” (short-term yields surpassing long-term yields) is considered an important indicator of an impending recession. The US yield curve has been inverted for over two years now, yet there are currently no clear signs of the US economy entering into a recession.