US economists have stopped worrying about a US recession, waiting for the Federal Reserve to bring the economy to a soft landing.
Markets and analysts stopped worrying about a US recession for the most part after the beginning of August saw a steep drop in major indexes. On August 5th, most global stock exchanges closed in deep red during the worst days for stock trading since the pandemic.
However, three weeks later, most analysts agree that the drop was caused by a much-needed market correction. Recession fears were mostly overblown, as the economic data coming out since the fall showed a resilient and overall healthy economy.
Last week, jobless claims fell 7,000 to 227,000 while retail sales jumped 1% in July. Continuing jobless claims similarly dropped by 7,000 to 1.864 million.
At the same time, US inflation is dropping more than expected, falling to 2.9% in July. The core value, excluding volatile food and energy prices, dropped as expected to 3.2%.
The S&P 500 rebounded August losses, coming just 1% shy from its July all-time high. Year-to-date, the S&P 500 gained over 17%, mostly driven by big tech stocks.
Goldman Sachs lowered the chances for a US recession in the next 12 months to 20%. Last month, the firm calculated a 15% chance for a US recession, increasing it to 25% after August 5th.
"We have now shaved our probability from 25% to 20%, mainly because the data for July and early August released since August 2 shows no sign of recession," Goldman Sachs chief U.S. economist Jan Hatzius said on Saturday.
Fed moves
The biggest player that will drive the United States in a soft or hard landing will be the Federal Reserve.
One of the reasons why markets crashed on August 5th was the Fed keeping interest rates stable at its July 31st meeting. The Federal Reserve brought rates to their 23-year high of 5.25% to battle inflation.
Markets now price in with absolute certainty a rate cut in September. This is supposed to propel the US economy further, avoiding a hard landing and keeping inflation at bay.
Analysts say there is a 25% chance of a 50-point cut, though two separate 25-point cuts by year’s end are more likely. The Fed moves will become clearer next week at the annual Jackson Hole meeting.
“We think a key highlight of [Fed Chairman Jerome Powell’s] speech will be the acknowledgment that progress on inflation has been sufficient to allow the start of rate cuts,” economists at BNP Paribas said on Thursday.
