Analysts offer recession predictions after market scare

Last week’s July jobs report led some economists and investors to worry that a recession is on the way.

The figures included an increase of 114,000 in non-farm payrolls during July, down from 179,000 in June and well below analysts’ forecast of a gain of 175,000. And the unemployment rate rose to 4.3%, the highest level since October 2021.

JP Morgan economists later raised their odds of an economic contraction by the end of the year to 35%, up from 25% previously.

July’s unemployment rate triggered the Sahm rule for recession (created by former Fed economist Claudia Sahm).

The rule states that the economy is in the early stages of a recession when the three-month average unemployment rate rises 0.5 percentage points above the 12-month low for the three-month average. That’s what happened in July.

Sahm herself, now chief economist at New Century Advisors, doesn’t see a recession as having begun.

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Labor force growth since the pandemic, driven largely by increased immigration, has caused official numbers to overstate labor market weakness, she told The Wall Street Journal.

To be sure, Sahm is concerned about rising unemployment and slowing job growth. “The risk of a recession is elevated,” she wrote for Bloomberg.

UNITED STATES – MARCH 7: Federal Reserve Chairman Jerome Powell is walking a tightrope between managing inflation and keeping the economy out of recession.

Tom Williams/Getty Images

Ned Davis’s take on the recession

Alejandra Grindal, chief economist at Ned Davis Research, does not see the economy in danger of recession in the near term.

“Other measures of the labor market and broader measures of the economy, while showing signs of slowing, do not match the Sahm rule recession signal,” he wrote in a commentary.

“The insured unemployment rate has never been this low, and the number of job openings/unemployed has never been this high when recessions started.”

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The insured unemployment rate is the percentage of the workforce covered by unemployment insurance that is currently receiving it. The rate was 1.2% for the week ended July 27. The number of unemployed job openings was 0.8 in June.

Additionally, it is “extremely unusual to see stocks rise in the months leading up to the triggering of the Sahm Rule, and never to the extent that we’ve seen in this cycle,” Grindal said.

The S&P 500 closed at a record high on July 16 and is up 19% over the past 12 months.

Bank of America Recession Analysis

More financial market readings point to a recession, says Michael Hartnett, chief investment strategist at Bank of America.

“The technical levels that would change the narrative on Wall Street from a soft landing (for the economy) to a hard landing have not been passed,” he said.

This includes a 4% yield on 30-year Treasury bonds. The yield was 4.22% on Friday. It also includes a level of 5,050 for the S&P 500. It closed at 5,344 on Friday.

More economic analysis:

• Black Monday on Wall Street: 5 Reasons Stocks Are Falling
• After the Fed Crashed the Markets, Now What?
• Jobs report triggers key recession warning signal as stocks fall

Also important is the Philadelphia Semiconductor Sector Index (SOXX) and the Select Technology Sector SPDR Fund (XLK) are holding above their 200-day moving averages, Hartnett said.

The Semiconductor Index traded at 4,709 on Friday, compared to its 200-day moving average of 4,600. And the Technology Fund closed at 206, compared to its 200-day moving average of 200.

If those levels break, equity traders will target the market highs of 2021, Hartnett said. It was 4,793 for the S&P 500 on December 29, 2021, about 10% below Friday’s close.

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