America might be staring down the barrel of yet another recession. If you listen to Chicago Fed President Austan Goolsbee that is. He thinks that trends in inflation and unemployment are pointing in the wrong direction. 

Inflation is slowing down faster than expected, but unemployment is rising – and that’s not good. According to Goolsbee, the Federal Reserve has multiple interest rate cuts planned over the next year to help cushion the blow.

Weak labor market

The U.S. labor market has been sending out distress signals, and August was no exception. Employers added 142,000 jobs that month, a drop from earlier in the year and well below what economists had been expecting.

To make matters worse, the average monthly job growth has shrunk to around 246,000 for 2024, down from over 300,000 in recent years. 

Sure, the unemployment rate dipped slightly from July’s 4.3% to 4.2%, but this doesn’t exactly inspire confidence. The overall picture is one of a weak labor market, period. Goolsbee says they have been watching this deceleration closely. 

For a while, they saw it as a sign of moderation, hoping it would lead to a more sustainable economy. But now, he said:

“It might turn into something worse.”

The Federal Reserve’s go-to measure, the Personal Consumption Expenditures (PCE) price index, only ticked up by 0.2% in July, and the core PCE inflation, which cuts out volatile food and energy prices, is sitting at 2.7% year-over-year. 

Another big concern is wage growth. The employment cost index – the Fed’s favorite way to track wage increases – has shown a slowdown in how fast wages are rising.

This directly affects consumer spending, which in turn slows down economic activity even more. 

And this is where the real danger lies: a weaker labor market combined with cooling inflation and slow wage growth creates a recipe for a recession.

The Fed may actually be too late with the cuts. The cuts might not even be enough to shield the economy from a recession.

What the economists are saying

Interestingly, some economists think America already is in recession. Others think the country is still just on its way to one.

Goldman Sachs reduced its forecast for the likelihood of a recession to 20%, down from 25% last month. On the other hand, the Conference Board thinks the economy is not on the verge of a recession, but it will continue to experience a huge slowdown in growth. 

After the surprising 2.8% annualized growth in Q2, they expect a deceleration to 0.6% in Q3, with Q4 growth projected at about 1% annualized.

John Connaughton of UNC Charlotte, forecasts a 20% chance of a recession occurring in 2025, mainly due to the potential change in administration if Donald Trump wins.

Citi U.S. Equity Strategist Scott Chronert said that while the fundamental outlook for financial markets remains strong, earnings forecasts for 2024 and 2025 are disappointing.

Whereas Joe Brusuelas of RSM genuinely believes that in order to maintain a stable unemployment rate, the economy needs to add around 100,000 jobs monthly.

So, yeah. The risks are piling up, and Goolsbee is clearly worried. Manufacturing, a major driver of economic growth, has been showing signs of stress. 

On top of that, stock market volatility is adding to the uncertainty. September is historically a rough month for the markets, and look around, it isn’t being any different this year, is it?

And then there’s politics. 

Whew!

The upcoming presidential election could make everything even more unstable. Political uncertainty always affects markets, and this election might be the craziest one we’ve seen in many cycles.

It could lead to lower confidence among both businesses and consumers, which would only make things worse for an economy already doing pretty bad.

The general consensus among economists is that real GDP growth for the second half of 2024 will average about 2.0%. That lines up with the annual growth forecast of 2.5% for the entire year. 

When you compare that to previous years, you’ll see that the economy is losing a lot of steam. 

Last year, it grew by about 3.0%. That’s quite a drop from the 5.7% we saw in 2022 when the country was still riding high on that post-pandemic recovery. 

Consumer spending was strong, and the labor market was healthier back then. But now, things are different. 

The Fed’s meeting kicks off exactly ten days from now. Remains to be seen what the first rate cut will actually do.