JPMorgan Ups U.S. Recession Odds to 35% as July Jobs Report Fuels Market Fears

• JPMorgan increases U.S. recession risk to 35% for 2024, citing weakening labor market and wage inflation.
• July jobs report triggers fears as unemployment rate rises, activating the Sahm Rule recession indicator.
• Fed expected to cut interest rates twice in 2024 amid growing concerns of economic slowdown and market volatility.

JPMorgan has heightened the likelihood of a U.S. recession this year to 35%, up from the previous 25%. This revision follows recent signs of easing labor market pressures and a weaker-than-expected July jobs report. 

The Wall Street brokerage noted that slowing wage inflation in the U.S., unlike in other developed markets, has increased confidence that service price inflation will decline. Economists argue that the Federal Reserve’s current policy stance remains restrictive, and they anticipate a shift in interest rates.

July Jobs Report Triggers Recession Fears

The July jobs report, which showed nonfarm payrolls growing by just 114,000, significantly contributed to recession fears. This disappointing figure, combined with an unexpected rise in the jobless rate to 4.3%, has raised concerns about the U.S. economy’s health. Over the past three months, the unemployment rate has averaged 4.13%, notably higher than the 3.5% recorded in July 2023. 

This increase triggered the Sahm Rule, a key recession indicator that has historically predicted every U.S. recession since 1970. The rule suggests a recession is likely when the three-month moving average of the jobless rate is at least a half-percentage point higher than the 12-month low.

Fed’s Policy Shift Expected Amid Growing Recession Risks

Given the current economic sector, JPMorgan expects the Federal Reserve to abandon its gradual approach and lower interest rates by at least 100 basis points by year-end. The Fed is now forecasted to cut rates twice this year, in September and November, with markets pricing a 100% chance of a 50 basis points rate cut in September, according to CME’s FedWatch tool. This anticipated shift in policy reflects the growing concerns that easing labor market conditions and slowing inflation may require more aggressive action to support the economy.

Market Volatility Intensifies as Recession Risks Loom

Global markets have reacted sharply to these developments, with equities experiencing significant sell-offs. The S&P 500, for instance, had its worst day since October 2022 following the release of the July jobs report. 

The volatility continued throughout the week, although some relief came as jobless claims data exceeded expectations on Thursday. Meanwhile, Goldman Sachs has also raised its probability of a U.S. recession, now placing the odds at 25% for the next 12 months. This adjustment highlights the growing uncertainty surrounding the U.S. economy’s trajectory as the year progresses.