Earlier this month, the US Labor Department reported that job growth slowed in July and that unemployment reached 4.3%. the highest rate as of October 2021. The weaker-than-expected report prompted Goldman Sachs to raise odds of a recession from 15% to 20% and JPMorgan Chase at increases chance from 25% to 35%.
Based on the new data, some strategists I think a recession is still on the waybut EY Chief Economist Gregory Daco says these concerns are “overstated”.
“Labor market conditions have softened significantly, but economic momentum remains positive,” Daco said The entrepreneur in an email. “The US economy is still moving forward at a modest to moderate pace.”
Related: 'The stage is set:' EY's senior economist expects three rate cuts before the end of the year
Although July's jobs report showed wage growth was 3.6% year over year, the smallest gain since May 2021and that the economy added 114,000 jobs compared to at least 200,000 are needed to keep up with population growth, Daco says a strong July retail sales report showed that people were still willing to buy and spend money.
Retail sales rose 1% last month, easing “recession fears” and confirming “resilience in consumer spending,” he said.
Related: Inflation hits 3-year low, analysts predict Fed will cut rates next month
However, Daco predicts that the unemployment rate will continue to rise, heading towards 4.5% heading into 2025.
“We expect business leaders to continue to hold back wage growth, hire cautiously and continue with strategic layoffs to improve costs,” Daco said.
He predicted that, as a result, economic activity will be slower in 2025 and that households will be more cautious about spending due to high interest rates and slowing income growth.
When is the Fed cutting interest rates?
On the business side, high funding costs mean businesses need to hire and invest carefully – but they are not downsizing or downsizing in response to the economic climate. The volatility of the economy “is more a reflection of the Federal Reserve's position behind the curve in terms of easing policy than a reflection of any underlying economic weakness,” Daco asserted.
That's a good thing, according to Dacos, because the Fed can adjust its policy. In one speech Friday in Jackson Hole, WyomingFederal Reserve Chairman Jerome Powell said “the time has come for policy to adjust” to a cooling job market, indicating that lowering the federal funds rate were close.
US Federal Reserve Chairman Jerome Powell. Photo by ROBERTO SCHMIDT / AFP
According to Daco, the question now is not whether or not the Fed will ease the federal funds rate in September, but by how much. He reiterated a prediction made by EY senior economist Lydia Boussour The entrepreneur last week – that would have three rate cutseach of at least 25 basis points (bps) or 0.25%, in September, November and December, three remaining scheduled meetings of the year.
“The Fed has fallen behind the curve, but Fed Chairman Powell is playing catch-up,” Daco said.
A 2024 Gallup poll shows that close three out of five Americans mistakenly think the US is in a recession.