Fears of a recession in the U.S surge: Here's why

Fears of a recession in the U.S have resurfaced. The U.S markets ended sharply lower on Thursday while the Wall street's fear gauge - the VIX - hit its highest level since April.

The impact was felt in the Asian markets as well as the Indian stock markets which were in the red. So what happened? Let's break it down.

Just recently, the U.S Federal Reserve left policy rates unchanged once again, keeping them steady for the 8th time at 5.25% to 5.5%, the highest level in 22 years.

However, Fed Chair Jerome Powell maintained that a rate cut in September is on the table provided the data continues to remain encouraging. Now, markets are anticipating atleast two rate cuts in the calendar year 2024.

Initially, markets reacted positively to this statement.

But it was short-lived because what followed was weak data points that triggered a drop.

Initial jobless claims data showed that claims rose the most since August 2023. Following this, the ISM Manufacturing index, which is an indicator of factory activity in the US, came in at 46.8, which is worse than expected and is a sign of economic contraction. The 10-year treasury yield dropped below 4% for the first time since February.

So, what exactly is the US Fed saying? In this calendar year, there are three policy meetings left, and analysts are expecting two rate cuts.

The Fed has acknowledged that inflation has reduced but stressed that the target of below 2% is still far off.

Employment remains a concern, with the unemployment rate edging up but still relatively low.

Despite inflation easing over the past year, it remains somewhat elevated. Powell noted that there has been progress toward the Committee's 2% inflation objective, but the economic outlook remains uncertain.

On the brighter side, GDP data suggests that the US is not yet in a recession. The US Bureau of Economic Affairs reported a 2.8% GDP growth in Q2 2024, up from 1.4% in Q1.

However, rising unemployment, decreasing production, and elevated inflation levels continue to raise concerns.

Economist Chris Rupkey told CNBC that despite possible rate cuts this year, the winds of recession are coming in hard.

Stay updated with the latest business news and insights. Don’t forget to like, share, and subscribe to businesshook for daily updates!