Over the past few days, global stock markets have been plummeting. Trading screens across the US, Asia, and, to a certain extent, Europe are awash with blinking red numbers heading south. The sudden turn comes as fears grow that the US economy, the world’s biggest, is slowing down. Experts say the main reason for this fear is that US jobs data for July, released on Friday, was much worse than expected.
Global stock markets have fallen due to US economy slowdown concerns, worsening jobs data, and the “Sahm rule.” The Fed’s decision not to cut interest rates raises speculation, while AI optimism has boosted technology companies and share prices. pic.twitter.com/p9rpfhiFFm
— Daily News Field (@Daly_News_Field) August 5, 2024
However, for some, talk of an economic slowdown, or even a recession, is a little premature. So, what did the official figures show us? As always with economics, there is good news and bad news. Bad news first: US employers created 114,000 jobs in July, which was way below expectations of 175,000 new roles. The rate of unemployment also rose to 4.3%, a near three-year high, which triggered something known as the “Sahm rule.”
Named after American economist Claudia Sahm, the rule says if the average unemployment rate over three months is half a percentage point higher than the lowest level over the past 12 months, then the country is at the beginning of a recession. In this case, the US unemployment rate rose in July, so the three-month average was 4.1%. That compares to the lowest level over the last year, which was 3.5%. Adding to these concerns was the fact that the US Federal Reserve voted last week not to cut interest rates.
Other central banks within developed economies, including the Bank of England and the European Central Bank, have recently cut interest rates. The Fed held borrowing costs, but its chair, Jerome Powell, signaled that a cut in September was on the table. However, this led to speculation that the Fed had waited too long to act. A cut in interest rates means it is cheaper to borrow money, which should, in theory, act as a boost to the economy. If the jobs figures suggest that the economy is already tipping downwards, then the fear is the Fed is too late.
Then, on top of all this, are technology companies and their share prices. There has been a long-running rally in their shares, fueled in part by optimism over artificial intelligence (AI). Last week, the chip-making giant Intel announced it was cutting 15,000 jobs. At the same time, market rumors suggested that rival Nvidia may have to delay the release of its new AI chip. What followed was a bloodbath on the Nasdaq, the technology-heavy US index. After hitting a high only a few weeks ago, it plunged by 10% on Friday. That helped pump up the fear factor across markets and that’s where danger could lie.
US stock markets fell after falls in Europe & Asia fears that the US economy is heading for a slowdown. Technology-heavy Nasdaq index opened 6.3% lower after a sharp decline last week. Shares in big tech companies, eg focused on AI were overvalued now correcting. Trump gloating. pic.twitter.com/xzvykmgEKm
— Ann Johns, Grumpy Geordie Gran #PAL #Save our NHS (@AnnJohn30914404) August 5, 2024
If stock market panic continues and shares keep plunging, the Fed could potentially step in before its next meeting in September and cut interest rates. This could happen, according to Neil Shearing, group chief economist at Capital Economics, if there is “a market dislocation that deepens and starts to threaten systemically important institutions and/or broader financial stability.”
Now for the good(-ish) news. “We are not in a recession now,” according to Ms. Sahm herself, inventor of the rule. She told CNBC on Monday that “the momentum is in that direction.” But she added: “A recession is not inevitable, and there is substantial scope to reduce interest rates.” Others are equivocal about the jobs data. “While the report was bad, it wasn’t that bad,” said Mr. Shearing. “It is likely that Hurricane Beryl contributed to weakness in July’s payrolls figure. Other data painted a picture of a labor market that is cooling, but not collapsing,” he said.
Dow Sinks 1,000 Points, Extending A Global Rout, As Worries Deepen About A US Economic Slowdown https://t.co/kpHsErTHPK #FinancialMarkets #USEconomy #WallStreet
— Beloud (@beloudcom) August 5, 2024
He added that there appeared to be “no increase in firings” while a “modest” decline in average weekly hours worked in July “does not scream ‘recession’.” For Simon French, chief economist and head of research at Panmure Liberum, after digesting the US jobs data, it’s time to take a moment. “Stepping back, have we suddenly re-appraised the health of the world’s biggest economy? No and nor should we.” But he added: “It is another data point at a time when liquidity is thin and you’ve got a lot of things to worry about.”
Key Points:
i. US Jobs Data Disappoints: The US economy created only 114,000 jobs in July, far below the expected 175,000, with unemployment rising to a near three-year high of 4.3%.
ii. Interest Rate Concerns: The US Federal Reserve’s decision to hold interest rates steady, despite other central banks cutting rates, has led to speculation about delayed action potentially harming the economy.
iii. Tech Sector Troubles: Major job cuts at Intel and rumors of delays in Nvidia’s new AI chip release contributed to a 10% plunge in the Nasdaq, exacerbating market fears.
iv. Recession Debate: Despite the downturn, some economists, including Claudia Sahm, argue that a recession is not inevitable and emphasize the potential for interest rate reductions to stabilize the economy.
v. Market Reactions: Analysts note that while the job market is cooling, indicators like stable firing rates and modest declines in weekly hours worked suggest the economy is not yet in a full-blown recession.
RM Tomi – Reprinted with permission of Whatfinger News
