After a dramatic sell-off, relative calm has returned to global financial markets — for now at least. Behind the jitters are investors who are questioning whether the American economy will achieve a long-expected “soft-landing” (where inflation returns to target without a significant slowdown). That assumption had helped push the S&P 500 to a record high by mid-July. Weak jobs data and the US Federal Reserve’s decision to hold interest rates at their peak last week stoked doubts.
Stepping back, the US is not in a recession nor is one necessarily imminent. Initial fears that the rout in financial markets could slow the real economy via a self-reinforcing downward spiral of selling have been averted as traders have started buying again. The weaker-than-expected US employment data for July, released on Friday, is also no immediate cause for alarm. The jobless rate has risen 0.6 percentage points since January, but part of the pick-up has been driven by more people entering the workforce.
Still, the American economy is cooler than markets and the Fed had perhaps appreciated. Indeed, the weak employment numbers should focus minds on the broader slowing under way in America. Take US consumers. Recent estimates suggest that excess savings from the pandemic — which helped prop up spending — have run dry. Annual spending is now growing faster than income, which is not sustainable. As it is, the credit card delinquency rate has surpassed pre-2020 levels. And while households are spending strongly, the bulk of it appears to be on non-discretionary items including high rents, utilities, and healthcare.