US Economic Crisis: Are We On The Brink Of A Major Recession?

Global stock markets have recently experienced a significant decline, with trading screens across the US, Asia, and parts of Europe flashing red as shares tumble. This sharp downturn is largely attributed to mounting worries about a potential slowdown in the US economy, which, as the world's largest, has a substantial impact on global markets.

What Is A Recession?

A recession is a major slowdown in economic activity that lasts for a significant period. You can usually see it in various areas like GDP, real income, jobs, industrial production, and sales. Economists often define a recession as two consecutive quarters where the economy shrinks.

Several things can cause a recession, such as people and businesses spending less, high unemployment, or financial crises. During a recession, companies might reduce production and investments, which can lead to job losses and lower consumer confidence. To help the economy recover, governments and central banks often use policies to boost spending and investment.

Disappointing US Jobs Report

The main reason for this concern is the recent US jobs report for July. The data showed that employers in the US only added 114,000 new jobs, which was much lower than the expected 175,000 jobs. Additionally, the unemployment rate went up to 4.3%, which is close to its highest level in nearly three years. This increase in unemployment has led some experts to worry that the US could be starting a recession, according to something called the "Sahm rule." This rule, created by economist Claudia Sahm, suggests that if the average unemployment rate over three months is significantly higher than the lowest level in the past year, it might mean the economy is beginning to slow down.

Another factor adding to the unease is the decision by the US Federal Reserve to keep interest rates unchanged. Unlike other major central banks, such as the Bank of England and the European Central Bank, which have recently lowered their rates, the Fed chose not to cut rates. This has raised concerns that the Fed might be missing a chance to help the economy by making borrowing cheaper. When borrowing is cheaper, it can encourage spending and investment, which helps the economy grow.

The technology sector, which had been doing well, has also been hit hard. Intel recently announced it would cut 15,000 jobs, and there are rumors that Nvidia might delay its new AI chip. This news caused a significant drop in the Nasdaq index, which includes many tech companies. The Nasdaq fell by 10% on Friday, increasing fears in the stock market.

Housing Market Faces Huge Insurance Deficit

David Burt from DeltaTerra Capital warns that US homeowners have a big insurance gap for wildfire and flood risks, totaling $28.7 billion a year. This affects over 17 million homes and could threaten $1.2 trillion in property values.

Burt says this issue won’t trigger a global financial crisis but could heavily impact local communities, similar to the Great Recession. Climate-risk firm First Street Foundation estimates that nearly 39 million US homes are underinsured against natural disasters.

Insurance premiums in many areas don’t reflect rising climate risks. With 15 weather disasters already this year, the US could match or exceed last year’s record. Globally, natural disasters have caused over $120 billion in damage this year, but only $62 billion was insured, with most uninsured losses happening in the US.

Recession Fears And Political Reactions

Despite these worries, not everyone believes a recession is certain. Claudia Sahm, who created the Sahm rule, said that while the current data shows the economy is slowing, it does not necessarily mean a recession is imminent. She suggested that there is still room for the Federal Reserve to lower interest rates if needed.

The recent economic developments have also had political implications, especially with the US presidential election approaching. Former President Donald Trump has used the weak jobs report to criticize the current administration, claiming it shows the economy is failing under President Biden and Vice President Harris.

Some analysts believe that the situation might not be as bad as it seems. For example, the New York Federal Reserve predicts a 2.1% growth rate for the third quarter of this year, while the Atlanta Fed expects a 2.5% growth rate. Other indicators, such as factory production and consumer spending, still look strong.

While there are signs of economic trouble, including rising unemployment and falling stock prices, it is not yet clear if the US is heading into a full recession.