Some analysts believe that the first interest rate cut by the Federal Reserve signals that the US economy is already in recession or approaching one. Friday’s employment report will be another indicator of how far the economy has weakened.

The fear of recession in the United States continues to generate anxiety in the markets. While some experts claim that a recessionary phase is already underway, others see indicators suggesting that it could still be avoided in the face of a complex macroeconomic situation that generates uncertainty among analysts and investors alike.

Although the US Federal Reserve declared last week that it had begun cutting rates to recalibrate monetary policy and maintain labour market strength, economists such as Mark Spitznagel, chief investment officer and founder of Universa, see these cuts as the start of aggressive interest rate cuts that signal an impending recession.

‘The clock is ticking, and we are in black swan territory,’ he told Reuters last week. Adding that the recent ‘disinvestment’ of a closely watched part of the US Treasury yield curve, a key bond market indicator of a coming recession, signals the imminence of a sharp slowdown. 

A downward cycle that feeds itself

Weakening labour market conditions are particularly worrying when they signal a decline in employment flows, i.e. the movement of people in and out of jobs. This is the view of Anna Wong, chief economist at Bloomberg Economics, who forecasts a 70% chance that the US economy is already in recession or approaching one.

While a rise in unemployment is not necessarily alarming if people out of work quickly find another job, Wong notes that hiring has slowed. Both job vacancies and hiring intentions are declining, which could lead to longer periods of unemployment, a pattern that has often been observed in previous recessions.

Guy Miller, head of macroeconomics at Zurich, points out that the strong performance of the US equity market this year has increased the net worth of many investors, boosting consumer confidence, so he considers rate cuts in this environment ‘unusual’. He adds that inflation could be more persistent in the coming year than the market is currently pricing in, as service sector price increases remain high.

Other analysts assume that the labour market is normalising rather than faltering. As the labour market continues to evolve, economists and investors will be watching the data to be released this Friday for any further signs of weakness.

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