As of Aug. 15, J.P. Morgan Research indicates that the probability of a U.S. and global recession in 2024 has hit 35%, up from their 25% midyear estimate. While inflation seems to be slowing down, signs of weakening economic growth and a softer-than-expected labor market are key drivers behind this increased probability. Here's a closer look at the factors driving these concerns and what they might mean for interest rates and the broader economy.
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The July jobs report was a key indicator of the changing economic landscape. The report revealed an increase in the unemployment rate for the fourth month in a row, suggesting that the labor market, which remained resilient for most of the past year, is beginning to soften. This weakening in labor demand has prompted J.P. Morgan to reassess its growth forecast, now seeing greater recession risks.
Bruce Kasman, Chief Global Economist at J.P. Morgan, highlighted the factors contributing to this updated outlook. "U.S. news hints at a sharper-than-expected weakening in labor demand and early signs of labor shedding," Kasman stated. Additionally, global manufacturing and the euro area have shown a loss of momentum, areas that were previously expected to drive growth.
However, Kasman pointed out that key recession vulnerabilities – such as sustained profit margin compression, credit market stress, and energy or financial market shocks – are still absent. These factors have led J.P. Morgan to only slightly increase their recession probability assessment, moving it to 35%.
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Looking further ahead, J.P. Morgan has maintained the probability of a recession by the end of 2025 at 45%. While the political landscape remains uncertain, the overall assessment of long-term recession risks remains steady.
Inflation, a significant concern over the past year, has been cooling, prompting a reassessment of the Federal Reserve's interest rate strategy. J.P. Morgan now sees a 30% chance that the Fed will maintain high interest rates for an extended period, a decrease from 50% just two months ago. This shift reflects a changing economic environment, where strong supply-side performance and moderating labor demand ease inflationary pressures.
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Kasman explained, "The modest increase in our assessment of recession risk contrasts with a more substantial reassessment we are making to the interest rate outlook."
It's important to note that this anticipated rate reduction might not be mirrored globally. The risk shift on inflation appears to be U.S.-centric, and other economies may not experience the same policy adjustments. "Our experience shows that the pass-through of Fed policy changes to other economies is limited in the absence of a synchronized shift in macroeconomic fundamentals and financial market conditions," Kasman noted. "As a result, there is a good chance that the shift away from gradualism we now expect from the Fed will not be reflected more broadly."
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While the probability of a recession has increased, it's wise to consider the broader economic context. Although risks are rising, particularly in the labor market, other recession indicators are not flashing red.
Despite the risks of a recession, many positive things are still happening in the global economic environment. Eric Freedman, chief investment officer for U.S. Bank Wealth Management, says, "We still think this is a very positive investment environment. This is a well-telegraphed, slowing economy. If we felt there was a structural economic shift underway, we'd come to a different conclusion."
As always, it's important to plan carefully while navigating economic uncertainties. For those concerned about the implications of these developments on their financial future, consulting a financial advisor can provide personalized strategies to safeguard your assets and achieve your long-term goals.
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