Is the US Heading For a Recession?

Summary

The video discusses the US economy's recent performance and the Federal Reserve's decision-making process amid mixed economic signals. Despite low inflation and high growth, recent data indicates stubborn inflation and weaker job growth, sparking recession fears and a stock market sell-off. The video examines whether the US is on the brink of recession and the Fed's potential responses, highlighting the complexities of interpreting economic data and the challenges faced by policymakers.

Takeaways

• 📈 The American economy has outperformed expectations in recent years with low inflation and high growth despite interest rate hikes by the Federal Reserve.
• 💬 There was optimism for a 'soft landing' where inflation would decrease without a recession, but recent economic indicators have been less encouraging.
• 📉 Inflation has remained above target, growth has been under expectations, and weak job data has raised concerns about a potential recession.
• 🏦 The Federal Reserve's decision on interest rates depends on inflation levels and the perceived risk of a recession.
• 🔄 Mixed data on inflation and recession risks led the Fed to hold rates steady at 5.5% rather than cut them.
• 📊 Discrepancies between the payroll and household surveys made it difficult for the Fed to gauge the job market accurately.
• 📈 The payroll survey, favored by the Fed for its accuracy, indicated strong jobs growth, while the household survey showed stagnant or negative growth.
• 📊 Recent jobs data revealed weaker than expected job creation and an increase in the unemployment rate, triggering recession fears.
• 📉 The increase in unemployment符合 historical indicators, such as the 'Zam rule', which suggests the economy may be entering a recession.
• 📈 Despite concerns, there are reasons to be skeptical about an imminent recession, including an influx of new entrants to the job market and other positive macroeconomic indicators.
• 🌐 The stock market sell-off appears to be more of a market-specific correction influenced by global economic factors rather than a sign of a broader recession.

Q & A

What has been the general performance of the American economy in recent years compared to other developed economies?

The American economy has outperformed expectations in recent years, with low inflation and high growth, despite significant interest rate hikes by the Federal Reserve.

What is the term used to describe a non-recessionary decline in inflation?

A non-recessionary decline in inflation is referred to as a 'soft Landing'.

What factors influenced the Federal Reserve's decision-making regarding interest rates in their latest meeting?

The Federal Reserve considered two main factors: the level of inflation and the perceived risk of a recession.

Why might the Federal Reserve hold interest rates instead of cutting them?

The Federal Reserve would hold interest rates if inflation is too high or too sticky, as interest rate cuts could increase domestic demand and therefore inflation.

What was the Federal Reserve's decision regarding interest rates after their latest meeting?

The Federal Reserve decided to hold rates steady at 5.5%, as they did not consider the risks of a recession severe enough to justify a rate cut.

Why was the jobs data released on Friday significant in the context of the Federal Reserve's decision-making?

The jobs data released on Friday showed weaker job creation than expected, which contradicted the payroll survey data and sparked fears of a recession, influencing the Federal Reserve's decision-making.

What is the 'Sam rule' and how does it relate to recession indicators?

The 'Sam rule' is a rule of thumb used by the Federal Reserve that states when the 3-month moving average of the unemployment rate is at least 0.5 percentage points above its low over the prior 12 months, the economy is in the early stages of a recession.

How did the stock market react to the jobs data released on Friday?

The stock market reacted negatively to the jobs data, with the S&P 500 experiencing its worst single-day loss since 2022 and the NASDAQ dropping by 3.4%.

What are some reasons to be skeptical about the interpretation of the 'Sam rule' being triggered?

Interpreting employment data has been complicated by the surge of new entrants into the US job market due to rising immigration rates, and other macro indicators such as GDP growth and core inflation still appear positive.

What impact did the Bank of Japan's decision to hike rates have on the stock market?

The Bank of Japan's decision to hike rates led to a massive unwinding of carry trades, causing a collapse in Japanese stocks and a knock-on effect on other markets, including the US.

What dilemma does the current economic situation present for the Federal Reserve?

The Federal Reserve faces a dilemma between making an emergency interest rate cut to boost the economy and assuage recessionary fears, and the risk of signaling panic, which could be detrimental if the economy is more unstable than currently realized.

Outlines

00:00

📉 US Economy's Uncertain Future Amid Inflation and Recession Fears

The video discusses the recent performance of the American economy, which has outperformed expectations with low inflation and high growth despite interest rate hikes by the Federal Reserve. However, recent months have shown signs of instability with persistent inflation above target and underwhelming growth. The weak jobs data released has raised fears of a recession, leading to a significant stock market sell-off. The Federal Reserve's decision-making factors, such as inflation and recession risks, are explored, along with the inconsistency between the payroll and household surveys, which has complicated the Fed's approach to interest rates. The video also mentions the 'Zam rule', which suggests the US economy might be entering a recession based on the recent unemployment rate increase.

05:03

💼 Mixed Economic Signals and the Impact on the Stock Market

This paragraph delves into the complexities of interpreting economic data, such as the core inflation rate reported by the New York Fed, which has fallen close to the Fed's target of 2%. It also addresses the wider anxiety among investors due to concerns over an AI bubble and the Bank of Japan's decision to raise rates, which has affected global markets. The paragraph suggests that the stock market decline might be a market-specific correction rather than a sign of a broader economic recession. It highlights the dilemma faced by the Federal Reserve in deciding whether to cut interest rates to stimulate the economy or maintain rates to avoid signaling panic. The video concludes by promoting Nebula, a streaming service offering original content and ad-free news videos, and encourages viewers to sign up for a discounted annual plan.

Keywords

💡Nebula

Nebula is a streaming service co-owned by the creators of the video, offering original content and an ad-free viewing experience. It is mentioned at the beginning and end of the script as the sponsor of the video, emphasizing its role in providing a curated news experience.

💡American Economy

The American Economy is the central focus of the video, discussing its performance in comparison to other developed economies. It is characterized by low inflation and high growth, but recent indicators suggest potential instability, making it the core subject of the video's analysis.

💡Inflation

Inflation is a key economic indicator, referring to the rate at which the general level of prices for goods and services is rising. In the script, it is noted that inflation has been low but has remained stubbornly above the target, affecting the Federal Reserve's decisions.

💡Growth

Growth, in an economic context, refers to an increase in the production of goods and services. The script mentions that growth has been 'conspicuously high,' but recent data has shown it coming in under expectations, indicating a potential economic slowdown.

💡Federal Reserve

The Federal Reserve, often referred to as 'the Fed,' is the central banking system of the United States. It plays a crucial role in the video by making decisions on interest rates, which have a direct impact on inflation and economic growth.

💡Interest Rate Hikes

Interest Rate Hikes refer to an increase in interest rates by a central bank, in this case, the Federal Reserve, to control inflation. The script mentions 'steep interest rate hikes' as a measure taken by the Fed, highlighting its efforts to manage the economy.

💡Soft Landing

A Soft Landing is an economic term referring to a decline in inflation without causing a recession. The script discusses commentators' optimism about this possibility earlier in the year, contrasting with the more recent economic indicators.

💡Recession

A Recession is a period of negative economic growth that lasts for more than a few months. The script explores fears of a recession due to weak jobs data and other economic indicators, making it a significant concern in the video's narrative.

💡Jobs Data

Jobs Data refers to statistical information about employment within an economy. The script highlights the inconsistency between the payroll and household surveys, and the release of disappointing jobs data that sparked fears of a recession.

💡Unemployment Rate

The Unemployment Rate is the percentage of the labor force that is unemployed but seeking employment. The script notes an increase in this rate as a potential indicator of a recession, referencing the 'Sam rule' as a historical predictor.

💡Stock Market

The Stock Market is a platform where buyers and sellers trade company stocks. The script discusses a 'massive sell-off' in the stock market following the release of jobs data, indicating a broader investor concern about the economy.

💡Carry Trades

Carry Trades are investment strategies where an investor borrows in a currency with a low-interest rate to invest in a higher-yielding asset. The script explains how changes in interest rates by the Bank of Japan affected these trades and contributed to market volatility.

Highlights

The American economy has outperformed expectations with low inflation and high growth despite Federal Reserve interest rate hikes.

There has been talk of a 'soft Landing', a non-recessionary decline in inflation, due to the economy's performance.

Recent months have shown signs of instability with inflation above target and growth under expectations.

Weak job data has sparked fears of a recession, leading to a stock market sell-off.

The Federal Reserve's decision-making is influenced by inflation levels and the risk of recession.

Inflation has been stubbornly above 3% for over a year, indicating a potential issue for the Fed.

GDP growth and job creation data suggest a possible recession, complicating the Fed's rate decision.

The Fed decided to hold rates steady at 5.5%, not cutting them despite mixed data.

Discrepancy between the payroll and household surveys made it difficult for the Fed to assess job market health.

The Bureau of Labor Statistics reported weaker job creation in July, raising recession concerns.

An increase in the unemployment rate may indicate early stages of a recession according to the 'Sam rule'.

The stock market's reaction to job data and the 'Sam rule' being triggered led to a significant sell-off.

There are reasons to be skeptical about the recession indicators due to new entrants in the job market and other macro indicators.

GDP growth, despite being lower than expected, still shows positive numbers.

Core inflation, as measured by the New York Fed, has fallen close to the Fed's target.

Stock market declines may be due to wider investor anxiety and market corrections rather than a recession.

The Bank of Japan's decision to hike rates affected global markets and contributed to the stock market turbulence.

The Fed faces a dilemma in deciding whether to cut rates to boost the economy or avoid signaling panic.

Nebula offers a streaming service with original content and ad-free access to TDR videos.

Nebula News aims to guide viewers through the media landscape and help them stay informed without burnout.

Transcripts

this video was brought to you by nebula

the American economy has reliably

outperformed expectations for the past

couple of years compared to other

developed economies inflation has been

low while growth has been conspicuously

high despite some pretty steep interest

rate hikes by the Federal Reserve things

have been so good that when inflation

fell earlier this year commentators

started eagerly talking up the prospect

of a so-called soft Landing I.E a

non-recessionary decline in inflation

unfortunately for Americans however in

the past few months things have been

looking a bit shakier inflation has

remained stubbornly above Target growth

has come in under expectations and the

latest jobs data released on Friday was

so weak that it apparently sparked fears

of a recession triggering a massive

sell-off in the stock market so in this

video we're going to try and figure out

whether the US is actually on the brink

of a recession and whether there's

anything the FED can do to get things

back on track

[Music]

so this story probably starts last

Tuesday when the Federal Reserve held

its latest meeting when they were due to

decide whether to cut interest rates

which have been hiked to a 25-year high

of

5.5% or whether they should hold them

where they are broadly speaking there

are two factors in the fed's decision-

making here inflation and the perceived

risk of a recession if inflation is too

high or too sticky the FED would more

likely hold rates because interest rate

Cuts could increase domestic demand and

therefore inflation conversely if the

odds of recession were too high the FED

would be more likely to cut rates in

order to stimulate the economy and get

growth going again the data had been a

bit mixed here while inflation did look

a bit stickier than the FED would like

refusing to fall below 3% for the past

year that the odds of a recession also

seem to be rising GDP growth came in

well below expectations in the first

quarter and there was some evidence

suggest that job creation in the US

economy was slowing which would be

another sign of an impending recession

In the End the Fed decided that the

risks of a recession weren't

sufficiently severe to justify a rate

cut and on Wednesday announced that they

would be holding rates steadily at

5.5% in retrospect this was probably in

part because the jobs data at the time

was inconsistent while the so-called

payroll survey which samples aund of

firms and government agencies to

estimate earnings and jobs was showing

strong jobs growth the so-called

household survey which samples y you

guessed it households to estimate

employment was showing stagnant or

negative jobs growth these two measures

usually match up nicely and the fact

they didn't made it more difficult for

the FED in choosing not to cut rates it

seemed like the FED prioritize the

payroll data and well that's sort of

fair enough even though the payroll data

is often revised downwards it's

generally considered to be more accurate

than the household data both because the

payroll survey is re-calibrated to match

up with the census every year and

because the household survey suffers

from a smaller sample size and

deteriorating response rate

unfortunately for the FED though the

actual jobs data released by the Bureau

of Labor Statistics on Friday suggests

that the payroll survey was too

optimistic according to Friday's data

some 114,000 jobs were created in July

significantly lower than both the7

75,000 forecast by Wall Street and the

215,000 average gain over the past 12

months overall the unemployment rate

Rose by

0.2% from 4.1% to

4.3% this increase in unemployment set

the cat amongst the proverbial pigeons

because historically this sort of an

increase has been a reliable indicator

of a recession specifically the FED has

a rule of thumb known as the Sam rule

which states that when the 3month moving

average of the unemployment rate is at

least 0.5 percentage points above its

low over the prior 12 months the economy

is in the early stages of recession the

Zam rule has predicted basically every

recession since the 70s and July's data

means that it's just been triggered this

sparked the massive stock sell-off that

we saw on Monday when the S&P 500 saw

its worst single day loss since 2022 and

the NASDAQ dropped by

3.4% so does this mean that the US us is

on the brink of a recession or maybe

already even in a recession well it's

not entirely clear but there are reasons

to be skeptical of this

dorismar rule has been triggered

interpreting employment data has been

made more complicated by the

unprecedented surge a new entrance into

the US job market mostly as a

consequence of rising immigration rates

second other macro indicators still look

pretty good GDP growth was weaker than

expected for the first quarter but it's

still came in at 1.6% year onye

similarly while headline inflation is

still higher than the FED would like on

Monday the New York fed claimed that by

its preferred measure of core inflation

inflation had fallen to just

2.06% only a smidge above the fed's 2%

Target third and finally the declines we

saw in the stock market were also a

consequence of a wider anxiety among

investors about what increasingly looks

like an AI bubble with stocks like

Nvidia and Intel now down about 30% from

their recent highs as well as the bank

of Japan's decision to hike rates on

Wednesday basically because inflation

has been relatively low in Japan and

Japan has a ton of debt the bank of

Japan has kept rates static around zero

but at the same time other central banks

have been raising their rates so the Yen

has been declining in value this has

tempted investors into so-called carry

trades where investors borrow cheaply in

yen to buy high yield assets including

Japanese stocks however as other central

banks like the FED have stopped raising

rates and the bank of Japan has started

raising rates the Yen has appreciated

and this carry trade has become less

viable the boj's decision on Wednesday

sparked a massive unwinding of these

trades and therefore a collapse in

Japanese stocks which had a KnockOn

effect on other markets both because it

panicked investors and also because

Japanese investors had to sell foreign

assets like American stock

to meet liabilities during the turmoil

in this light what happened in the stock

market looks more like a market specific

correction rather than a symptom of a

recession in The Wider US economy it's

also worth saying that even if the stock

market had a tough day the S&P is still

up 10% this year so far and about 15%

year to date which is above the

historical average nonetheless this all

still presents the FED with a dilemma

things do look worse than they did a

week ago and an emergency interest rate

cut before the next meeting in September

could help boost the economy and assuage

recessionary fears on the other hand an

emergency cut could signal Panic which

could be bad news if the economy is a

bit frothier than we currently realize

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