Is the U.S. economy really going to decline? Multiple data judgments are inconsistent

According to the Wisdom Financial APP, the US non-farm payroll report unexpectedly weakened, with the unemployment rate hitting a new high since the pandemic, once again sparking concerns about the possibility of an imminent economic recession in the United States, which may thwart the Fed's expectations of a soft landing for the economy. With the Fed keeping interest rates at excessively high levels for too long, the US stock market has been volatile, and the narrative of the "Goldilocks" scenario that has lasted for several months has suddenly been overturned by angry bears.

So, what is the current state of the US economy? A single data point is usually insufficient to reflect the overall situation. Below is a set of indicators, some of which indicate that continuous growth is still favorable and a recession is unlikely, while others suggest the opposite:

Growth and Demand

Most recessions occur when overall economic output, i.e., Gross Domestic Product (GDP), significantly declines. However, this has not happened yet and does not seem imminent. The US GDP annualized growth rate for the second quarter was 2.8%, double that of the first quarter, exactly the average of the past six quarters, and equivalent to the average growth rate of the three years before the pandemic.

Although the composition of economic growth is changing, an indicator tracked by Fed Chair Powell to measure potential private sector demand, final sales to domestic private purchasers, remained at 2.6% in the second quarter, consistent with the average level of the past year and a half, as well as the pre-pandemic operating speed.

Service Sector Levels

The closely watched Institute for Supply Management (ISM) Non-Manufacturing Index in the US climbed into expansion territory, with new orders and employment indices rebounding. The S&P Global measure of global service sector activity in July reached its highest level in over two years. The service sector accounts for two-thirds of economic activity in the US.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated: "Surveys suggest that the US economy will continue to grow in the early third quarter, with growth rates similar to the 2.2% annualized GDP growth rate."

Cooling Inflation

Interest rates have been kept at such high levels because inflation surged in 2021 and 2022, and the decline is slower than the rise. At the beginning of this year, inflation unexpectedly rebounded, prompting the Fed to pause its plans to shift towards rate cuts.

However, recent data shows that inflation is approaching the Fed's 2% target level, which should prompt the Fed to start cutting rates soon. The question for many investors is whether the Fed waited too long to shift its focus from inflation to employment

Is the Job Market Signaling a Recession?

U.S. employers have slowed down their hiring pace, with an average increase of about 170,000 jobs per month in the last quarter. In July, only 114,000 jobs were added, compared to 267,000 jobs added per month in the first quarter of 2024 and 251,000 jobs added per month last year.

At the same time, the unemployment rate has risen for the fourth consecutive month in July, reaching 4.3%, which is nearly one percentage point higher than the low point in January 2023, marking the highest level since October 2021. Once the unemployment rate rises at this rate, it usually does not stabilize until the Federal Reserve cuts interest rates.

The "Sahm rule," which reflects the historical relationship between rising unemployment and economic recession, has recently attracted market attention. This rule states that when the three-month moving average of the unemployment rate is 0.5 percentage points higher than the low point of the previous 12 months, a recession has begun. So far, this rule has never been wrong.

Named after economist Claudia Sahm, the rule has raised concerns in the market. The economist told Bloomberg on Monday that she believes the economy may not be in a recession at the moment, but "we are uncomfortably close to a recession."

Rising Delinquency Rates

Data from the New York Fed shows that in the first quarter of this year, the delinquency rate on U.S. household debt rose to 3.2%, compared to 3.1% in the fourth quarter of last year. This is far below the 4.7% at the end of 2019 before the pandemic. Among credit card borrowers who have reached their borrowing limits, the delinquency rate has risen significantly, and this group is often younger with lower income levels.

Analysts say that the pressure felt by low-income families may have a ripple effect on the entire economy. The New York Fed will release second-quarter data on Tuesday.

Unexpected Downturn

In recent months, economic reports have often fallen short of economists' expectations, with weak job data on Friday being the latest example.

Citigroup's "Surprise Index" is nearing a two-year low. The index has only been around for about 20 years, so it does not have a mature record in predicting economic recessions, but it largely reflects a change in investor confidence in the Federal Reserve's ability to achieve an economic soft landing

What can be done?

During the economic recession of 2020, fiscal and monetary authorities made every effort to respond. The Federal Reserve lowered interest rates to zero and purchased trillions of dollars in bonds to ease the financial situation. Congress and two consecutive presidential administrations pushed for trillions of dollars in spending to support consumers and businesses.

This situation may be very different, partly because the economic downturn (if confirmed) appears to be much smaller than the massive gaps caused by the COVID-19 pandemic in the United States and the world economy, but not only for this reason.

The current policy interest rate of the Federal Reserve is in the range of 5.25%-5.5%, which provides more room to cut borrowing costs compared to the benchmark interest rate range of 1.50%-1.75% in March 2020. On the fiscal side, the high level of U.S. government debt may hinder the current or next presidential administration from taking strong stimulus measures