Recession Risk Rises: JP Morgan Sees 35% Chance of US or Global Downturn by Year’s End
New York, NY – JP Morgan Chase has increased its odds of a US or global recession before the end of the year, citing emerging concerns about the labor market and evolving inflation pressures. The bank now estimates a 35% chance of a downturn, up from its previous estimate of 25%, though it still maintains that a recession remains less likely than not.
Speaking to reporters, JP Morgan Chief Economist and Managing Director Bruce Kasman emphasized that while the increased recession risk is a cause for concern, it’s not a call to panic. “Our baseline is still to think that we make this orderly transition from an economy that was growing quite strong last year to something that’s still growing at a solid pace,” Kasman stated.
The bank’s revised outlook stems from a confluence of factors, including a cooling labor market, signs of job shedding, and adjustments in business behavior. While Kasman acknowledged that “there’s some hints" of these trends, he reassured that “I don’t want to say that that’s been taking hold in a big way.”
However, the bank’s concerns extend beyond the labor market. Kasman highlighted a shift in the inflation risk profile as well, with easing labor market pressures moderating wage gains and strong supply-side performance offering some relief. "The modest change in recession risk is interacting with the change in inflation pressures coming from the labor market,” Kasman explained, adding that “this has a much bigger effect on interest rates.”
The bank believes that the Federal Reserve will need to adapt its path in light of these evolving conditions, potentially moving away from the gradualism it’s been advocating for. Kasman expressed a belief that the Fed will be compelled to make a larger, more decisive adjustment to interest rates in the coming months. This, he argues, will help to rebalance risks and establish a more stable path for economic growth.
While the possibility of a recession remains a concern, Kasman stressed that it’s not a foregone conclusion. The key, he emphasized, will be to monitor the near-term developments in the labor market and consumer spending. "The first thing we want to see is some calm in terms of how the next labor market reports play out,” he said. “How the consumer spending plays out, and just see that the economy is settling into something more moderate, but not actually breaking."
With the global economy teetering on the brink of recession, the coming months will be crucial for policymakers and businesses alike. JP Morgan’s revised outlook serves as a stark reminder of the challenges ahead, urging all stakeholders to closely monitor the evolving economic landscape and prepare for a potentially volatile period.
JP Morgan Chase Raises Recession Probability to 35%, Citing Labor Market Shifts and Business Behavior
JP Morgan Chase has increased its probability of a US or global recession before the end of the year to 35%, up from 25% previously. While this still signifies a greater chance of avoiding a recession, the increased likelihood reflects growing concerns within the financial institution about the trajectory of the economy. This shift in outlook comes as JP Morgan’s Chief Economist and Managing Director Bruce Kasman points to specific economic indicators, namely labor market shifts and business behavior, as contributing to this heightened risk assessment.
Key Takeaways:
- Increased Recession Probability: JP Morgan Chase now sees a 35% chance of a global recession before the year’s end, up from 25%.
- Focus on Labor Market: Key concern revolves around potential job shedding and changes in business behavior as the labor market cools.
- Shifting Inflation Pressures: While recession risks are increasing, the easing labor market and moderating wage gains are also contributing to a shift in inflation dynamics.
- Federal Reserve Response: The evolving inflation scenario will likely influence the Federal Reserve’s monetary policy, prompting a potential shift from gradual interest rate adjustments to a more aggressive approach.
Labor Market Concerns Drive Recession Fears
Kasman emphasizes that while the overall economic outlook remains positive, changes in the labor market are raising concerns. Despite robust job growth in recent months, signs of job shedding and altered business behavior are prompting a more cautious stance.
"There’s some signs of things happening here which are raising some concern for us, particularly as we’re slowing the labor market," Kasman said. "There’s some signs that we’re starting to see some job shedding behavior, some shift in business behavior, which is giving us concern."
He acknowledges that the US economy is transitioning from rapid growth to a more sustainable pace, but the emerging shift in business behavior, potentially a response to factors such as high interest rates and global manufacturing slowdown, represents a key risk point. The concern, Kasman explains, is that as job growth moderates, businesses might feel compelled to reduce their workforce, potentially triggering a cycle of decreased consumer spending and economic contraction.
Inflation Dynamics and the Federal Reserve’s Path
Kasman underscores that the shift in inflation pressures, driven by a cooling labor market and moderating wage growth, is an equally important factor shaping the economic outlook. The interplay of recession risks and inflation dynamics significantly impacts interest rate expectations.
While the Federal Reserve has maintained a gradual approach to interest rate hikes, Kasman believes the evolving economic landscape might necessitate a more aggressive response, potentially involving a larger interest rate adjustment.
"The modest change in recession risk is interacting with the change in inflation pressures coming from the labor market that has a much bigger effect on interest rates," Kasman explains. "I think the big story about the last few weeks is how the interest rate outlook changes, how the FED path changes… and what would be the biggest one is that we’re seeing a slight uptick in unemployment rate, is it that we’re seeing a slowdown in job creation… are you worried about us household debt," Kasman concludes.
Business Behavior & the Path to Mitigation
Kasman points to business behavior, particularly their response to the evolving labor market, as the critical indicator to monitor. He highlights concerns over increased credit card debt, a factor that could further exacerbate economic vulnerabilities if consumer spending declines.
"I think the main thing here is business behavior and there’s a number of things that obviously influence it, including high interest rates, including the fact that we’ve lost some momentum in the global manufacturing sector," Kasman states.
Kasman believes the Federal Reserve currently lacks the ability to readily influence the economic trajectory in the short term due to existing economic pressures. However, he suggests that calm in the labor market data combined with stable consumer spending could mitigate recession risks.
Kasman advocates for a proactive approach by the Federal Reserve, suggesting they act preemptively through interest rate adjustments, preventing a more drastic economic downturn.
"The second thing, as I said with some of the inflation risk profile shifting in the labor market as well, the supply side doing well, to get the FED to move earlier and put us on a path here where we’re going to have a level adjustment, I would argue about a 100 basis points sometime in the next few months from the FED," Kasman remarks.
He believes such a move would help "rebalance" the risks by influencing financial market conditions and guiding the economy towards a more sustainable growth trajectory.
Striking a Balance: Recession Mitigation and Inflation Management
Kasman acknowledges the delicate balance that the Federal Reserve faces between controlling inflation and avoiding a recession. He emphasizes that the proposed interest rate adjustment, while potentially mitigating recession risks, should not be so aggressive as to reignite inflation.
"Sure, and that’s what’s been holding the FED back right now," Kasman states, "and I think again we’re talking about a move from what is a restrictive policy stance to something that’s less restrictive, I’m not convinced at this stage that a move from let’s say five and a half on the policy rate to four and a half is going to be followed by something like a move to three or below which the markets are starting to price in."
Kasman believes the ideal approach is to navigate towards a "level adjustment" — a strategic intervention to moderate the economy without triggering a sharp decline. This, he argues, will help establish a more stable growth path for the economy going into 2025.
The evolving economic landscape continues to pose challenges, with signs of a cooling labor market and the risk of a recession emerging. The actions of the Federal Reserve and the behavior of businesses will be crucial in determining the trajectory of the US economy in the coming months.
