U.S. Economic Slowdown or Recession? Insights from the Jackson Hole Symposium
The Jackson Hole Symposium is a global gathering of central banks, and this year's theme, "Reevaluating the Effectiveness and Transmission Mechanisms of Monetary Policy," is particularly timely.
Morgan Stanley predicts that Federal Reserve Chair Jerome Powell will emphasize during this discussion that even if inflation slows, the Fed can maintain economic growth while achieving its goal of reducing the inflation rate to 2%. This suggests that even if the Fed cuts interest rates, monetary policy will remain relatively tight.
Given the current situation, I believe the U.S. economy is experiencing a slowdown, but not a weakening.
For instance, the July employment data showed a decline to 115,000 jobs, which isn't great but isn't terrible either. The unemployment rate rose by 0.8 percentage points from its low, but this doesn't necessarily indicate an impending recession. The rise in unemployment is due to a slowdown in labor demand and an increase in labor supply, rather than widespread layoffs.
A similar situation is observed in the credit spread market. After some volatility, credit spreads have started to widen, but they are far from recession levels. Currently, the market remains open to issuers. Moreover, while there are more defaults in the market, they are mostly due to high debt costs rather than corporate bankruptcies. If the Fed cuts interest rates, these "soft defaults" will pose less of a challenge.
Regarding consumer spending, which currently accounts for about 70% of the U.S. economy, it is well above trend levels. A correction to levels more consistent with income fundamentals is necessary, and tight monetary policy will only accelerate this process. According to last week's retail sales report, U.S. consumers remain active.
Generally, markets trade based on the dynamic changes in economic growth rates. From the above economic indicators, it is evident that U.S. economic growth is slowing. Therefore, Powell may emphasize that while economic growth is slowing, it remains healthy enough to avoid a recession, thereby stabilizing investors.
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