Are We Going into a Recession? | U.S. Bank (2024)

Investors showed concern in early August following the release of a weaker-than-expected jobs report indicating slowing job growth and rising unemployment.² It temporarily altered what had been generally favorable investor sentiment and contributed to a rapid market selloff (the S&P 500 fell more than 8% from its July peak). However, subsequent economic data releases offered a more promising picture, and equity markets quickly rebounded.

“These drawdowns happen, but not very often,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “We still think it’s a great time to be invested.”

U.S. economy keeps growing

Improved second-quarter GDP reflected a solid increase in consumer spending, especially on services. Consumer spending has consistently been the biggest driver of the economic expansion since a brief but deep, COVID-19-related recession in 2020. In the second quarter of 2024, consumer spending added 1.95% to GDP growth, with increases in both goods and services activity.¹

“Consumer spending is proving resilient, and was somewhat elevated in the second quarter,’” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “This report provides signs of a much stronger economy, but we add a note of caution that data from one quarter does not yet represent a trend.”

Haworth says while the pace of growth may taper off, there are signs this economy has staying power. “Recent reports show consumer spending remains steady, durable goods orders are firm, manufacturing activity is stable and services activity is very good.” Haworth notes that while the markets were concerned over the July jobs report, other labor market metrics aren’t nearly so alarming. “Weekly initial jobless claims remained relatively steady in recent months, telling us that layoff activity is not picking up in any notable way.” Haworth believes that indicates no significant economic slowing is on the horizon.

Staving off a recession

Over the course of the 21st century, the global economy has confronted unique challenges, such as the financial crisis of 2007-2009 and the onset of the COVID-19 pandemic in 2020. Yet through a nearly 25-year period, the U.S. economy has expanded in all but two years. In the wake of inflation's surge in 2022, the Fed responded by sharply raising the federal funds target interest rate it controls. While designed to slow economic growth as a way to tame inflation, many analysts feared the Fed's actions, which led to higher interest rates across the economy and markets, would create too many economic headwinds, potentially resulting in a recession. Yet the economy has managed to grow consistently throughout this period of higher interest rates.

The Fed indicated recently that its focus is not just to stem inflation’s threat, but also to follow its mandate to maintain maximum employment.³ Concerns have grown that the steady rise in the unemployment rate over the past year is a sign of a weakening labor market, a possible trigger of an economic slowdown. “The Fed has made clear it intends to cut interest rates at its September meeting,” says Haworth. “The main question now is how far and how fast the Fed cuts rates.”

Bill Merz, head of capital markets research for U.S. Bank Wealth Management, says recent inflation declines give the Fed additional leverage. “If the Fed continues to see a modest deceleration in inflation, but balances that with concerns about a decelerating labor market, it gives them more room to cut rates faster than they initially planned.” Merz says investors may see, in the coming months, potentially meaningful Fed rate cuts designed to help maintain economic expansion.

Can the economy stay on track?

“Modest, steady economic activity continues to be the path we appear to be on at this point, and there don’t seem to be signs of serious recession risk,” says Haworth. “Nevertheless, a big question that may drive the markets and the pace of Fed rate cuts is whether consumers can continue spending at a sufficient pace to keep the economy growing.”

Economic obstacles could still emerge, even as the Fed contemplates initiating rate cuts. “What surveys are telling us is that price levels are challenging for some consumers, and on top of that, borrowing is expensive as well,” says Haworth. “While that may ultimately impact consumer spending levels, we’re not seeing it yet.”

Stubbornly high interest rates complicate matters for businesses as well, particularly as it relates to business capital investment. “If rates stay elevated and companies are forced to issue debt with more significant financing costs, that could dampen business activity and threaten current expectations for economic growth,” according to Haworth. Nevertheless, corporate capital expenditures remain solid to this point.

Implications for investors

“We still think this is a positive investment environment,” says Freedman. “This is a well-telegraphed, slowing economy. If we felt there was a structural economic shift underway, we’d come to a different conclusion.” Freedman says consumers remain in a solid position to play a pivotal role in keeping the economic expansion intact.

Haworth says the combination of ongoing economic growth and persistent inflation make stocks more attractive relative to bonds. Haworth adds if the economy manages to demonstrate ongoing strength in the coming months, that could work to benefit non-technology sectors of the market that are more dependent on favorable economic trends. For example, utility stocks, which struggled in 2023, represent one of the top-performing sectors within the S&P 500 year-to-date in 2024.⁴

Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet the challenges of what continues to be a dynamic market and economic environment.

Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.

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