US recession fears increase unemployment, ‘household cash reduction, low-income consumption decrease’
US recession fears are due to ‘household cash accumulation depletion’ and ‘low-income consumption decrease’, and the developer of ‘Sham’s Law’, which shows the third increase in unemployment rate, revealed that ‘a recession is possible within 3-6 months’.
Despite several recession warnings by US economists, there was not much actual data evidence, but this sudden increase had a big shock wave on the July unemployment rate increase, but the basis of the recession fear was confirmed to be ‘household cash accumulation depletion’ and ‘low-income consumption decrease’, the New York Times reported on the 6th.
The reason why recession fears have re-emerged is the ‘start of cracks’ in the data, more and more people are delinquent on their credit card bills and car payments, unemployment benefit applications are starting to increase, and overall consumer spending is strong, but there are actually signs of a decrease in consumption by low-income consumers.
The New York Times reported that “the July employment data, the trigger for this shockwave, was the clearest warning sign of this,” adding that “job gains were much slower than expected and concentrated in a few industries, and the third increase in the unemployment rate in four months was enough to signal the start of a recession, according to a well-known indicator known as the Sahm Rule.”
Claudia Sahm, a former Fed economist who developed the “Sahm Rule” as a recession indicator, told the Times that her namesake indicator may have been muddled because “the chaos of the pandemic and its aftermath has left many other once-reliable recession warning signs.”
She continued that “the basic logic that even a small increase in the unemployment rate is cause for concern still holds true,” adding that “given everything we know or think we know, the U.S. is not in a recession. But what about the risk of a recession in the next three to six months? It’s really gone up.”
The New York Times said that there is a crucial difference between the early and recent recession predictions and the recent warnings, saying that the previous predictions were based largely on historical patterns and theoretical models, while the new indicators are based on actual evidence of a slowdown.
When U.S. economists began predicting a recession in 2022, inflation was high and the Federal Reserve aggressively raised interest rates to control it, which has usually led to recessions in the past.
U.S. economic policy has tried to suppress demand just enough to lower inflation, but it has ended up overshooting and causing widespread layoffs, which has contributed to recessions.
Unlike that historical pattern, this pandemic was different from the beginning because consumers and businesses had relatively little debt and financial resources, and were less sensitive to rising borrowing costs as they emerged from the pandemic’s high debt levels.
As the pandemic-related disruptions gradually eased, inflation pressures were able to ease without a significant drop in demand for goods and services. “All the usual rules that tend to apply both in historical experience and theoretical models were very different this time,”
ara Sinclair, a professor at George Washington University who recently retired from the U.S. Treasury, told the Times.
As a result, many economists warned that a recession was coming as interest rates remained high during the pandemic, but there was little evidence of a recession in the economic data, and employment, wage growth, and consumer spending all moderated, but none of them collapsed.
In particular, the U.S. unemployment rate was near its lowest in decades, and gross domestic product (GDP), the broadest measure of economic output, continued to grow at a healthy pace.
The July unemployment data sent shockwaves as lurking increases in credit card and auto delinquencies coincided with a surge in unemployment claims, sending stocks tumbling.
U.S. economists linked recession fears to the more visible signs of a decline in low-income consumers, rather than the overall appearance of sustained consumer spending.