A weak US jobs report, with the highest unemployment rate since the pandemic, has raised concerns that a recession may be on the way, which would dash the Federal Reserve's hopes for a soft landing for the economy.
With the stock market reeling on the assumption that the Fed has now kept interest rates too high for too long, the narrative of the rate-setting outcome has come as a surprise.
On that basis the current situation in the US economy is getting more and more attention. These are some indicators to watch out for.
1. Growth and Demand
Most recessions occur because overall economic output, also known as gross domestic product, falls significantly. That hasn't happened and doesn't look like it will anytime soon.
Growth in the second quarter was at an annualized rate of 2.8%, double the rate of the first quarter, right on the average of the last six quarters, and equivalent to the average growth rate for the three years before the pandemic.
Although the mix of growth is changing, a measure followed by Fed Chairman Jerome Powell as an indicator of underlying private sector demand, final sales to private domestic buyers remained at 2.6% in the second quarter.
2. Strength of the Service Sector
The closely watched services activity index by the Institute for Supply Management climbed back into expansion territory and measures of new orders and employment both recovered.
A rival measure of services activity, which accounts for two-thirds of US economic activity, from S&P Global remained near its highest level in more than two years in July.
"July's survey showed the economy continued to expand at the start of the third quarter at a pace on par with GDP increasing at a robust 2.2% annual rate," according to Chris Williamson, chief business economist at S&P Global Market Intelligence.
3. Cooling Inflation
The reason interest rates remain high is because inflation spiked in 2021 and 2022 and is slower to fall than it is to rise. The year began with an unexpected increase in inflation that made the Fed hesitant to move to a rate cut.
The latest data, however, shows it is getting closer to the Fed's target level of 2%, which should allow rate cuts to start soon. The question many investors have is whether the Fed waited too long to shift its focus from inflation to jobs.
It should be noted, US employers have slowed hiring, adding an average of around 170,000 jobs per month over the past three months, and only 114,000 in July, compared to 267,000 per month in the first quarter of 2024, and 251,000 last year.
Meanwhile the unemployment rate rose in July for the fourth consecutive month, to 4.3%, almost a full percentage point above the January 2023 low and the highest since October 2021.
When the unemployment rate rises with such momentum, it usually doesn't stabilize until the Fed cuts interest rates.
The Fed's policy rate is now in the 5.25%-5.5% range, providing more room to reduce borrowing costs than in March 2020, when the benchmark rate was in the 1.50%-1.75% range.
And on the fiscal side, the high level of US government debt could prevent a strong stimulus response from the current or next presidential administration.
