David McNamara: Markets may be pricing in a recession ahead of Fed meeting 

The US economy is slowing but there are few signs a recession is imminent.

Given recent market gyrations, exacerbated by a weaker US payrolls number in July, it is worth asking whether the repricing of Federal Reserve futures markets for aggressive near-term rate cuts is warranted.

Currently, markets are pricing in nearly 100 basis points of cuts by the Fed by end of 2024, pulling back from the near 125 basis points of cuts priced in on Monday, August 5, following the equity market rout. However, while the US economy is slowing, there are, as yet, few signs a recession is imminent.

The US economy has been slowing of late following the rapid consumer-led boom from 2022 to 2023. This was inevitable, as US households ran down covid-era savings, and a wage-price spiral failed to materialise on the back of high inflation, which might have sustained spending.

Indeed, US household savings are now below where they were in 2019, meaning future consumer spending growth will be firmly tied to household earnings. 

In the labour market, jobs growth has clearly slowed in recent months, with downward revisions to payrolls growth in the three months to the end of June and the below-consensus out-turn for July which spooked investors last week.

Digging into the payrolls data shows a general slowdown in private sector hiring, particularly in the retail and hospitality sectors, on top of some weather-related effects in July.

However, an underappreciated driver of the recent slowdown in jobs growth has also been the pullback in hiring by the public sector in the US.

Rapid growth in US payrolls was sustained into the first three months, but since April this hiring has eased considerably.

Therefore, the US labour market might now be feeling the effects of the fading fiscal stimulus enacted by President Biden in 2022, alongside the lagged effects of monetary tightening by the Fed on private sector hiring and investment.

As indicated by US Federal Reserve chair Jerome Powell last week, the monetary policy-setting committee is now placing greater emphasis on a weakening labour market as its dual mandate of stable inflation and maximum employment “continues to move into better balance” and is set to cut at its next meeting.

However, a 50 basis point cut is unlikely in September, unless a further sharp deterioration in payrolls comes through in August.

• David McNamara is chief economist at AIB