Do the math. Recession risks add up.

COMMENTARY

When I saw the stock market rout in recent days, I was relieved. The big dip did two things that were much needed: First, it took some craziness out of the market. The "magnificent seven" tech stocks needed a reality check on their valuations, and they got it.

Second, the big dip pretty much guarantees the Federal Reserve will cut interest rates in September - and probably a few more times this year.

The risk of a recession is now clear for anyone to see.

Is the United States already in a recession? Virtually all the evidence says no. The economy is still growing at a robust pace and adding more than 100,000 jobs a month. Most importantly, businesses are still investing and families are still spending. While Americans are no longer splurging on new trucks, kitchen renovations and huge weddings, they continue to do mini-splurges, especially if they can get a good deal. The U.S. economy didn't fall off a cliff in the past week.

What changed is investors went from thinking there was almost zero chance of a recession in the coming months to thinking there is a 25 percent likelihood. It's still small, but that risk had to be factored in.

What's really going on is the economy is slowing down to a walk after years of sprinting. It's hard to judge slowdown situations. Everyone is trying to figure out whether the economy is moderating to a normal walking pace, an Olympic speed-walking gait or something that looks a lot like a hobble. People can feel the deceleration. There aren't as many "we're hiring" signs around, and discounts are back everywhere from McDonald's to Saks Fifth Avenue.

This is a different economy from the one we had a year ago.

In 2023, consumption (adjusted for inflation) was averaging 2.75 percent growth. So far this year, that's cooled to a 1.9 percent pace. That's just below the historical norm, but it feels weak after the post-pandemic boom.

It's a similar story in the labor market. Unemployment is up (4.3 percent now versus 3.5 percent a year ago), and it's taking longer for people laid off to find jobs.

While unemployment remains low by historical standards, it's noticeable that 1 million more people are out of work now than a year ago. Another factor to watch is the "diffusion index" that looks at what percentage of 250 industries are hiring. Last summer that index was hovering around 60 percent, indicating broad-based job growth. This July, it fell below 50 percent for the first time since spring 2020, a signal of how little hiring is occurring outside of health care and government.

On Wall Street and Main Street, there's an overriding sense of wait-and-see.

This is why companies aren't hiring - or firing - much lately, and Americans are putting big purchases on hold. The reason the "R" word is back is because one of the nation's best recession indicators - the Sahm Rule - was triggered on Friday after the unemployment rate jumped to 4.3 percent. The rule says if the unemployment rate rises by more than half a point in a year, then a recession has begun. The reason it has worked historically is as more people get laid off, consumer spending slumps, which results in more layoffs. But it's possible this time is different.

There were a lot of flukes in the July report. Hurricane Beryl caused a surge in "temporary layoffs" in July. There's a good chance the August jobs report will show a rebound. In economics, one month doesn't make a trend.

What happens next depends on the Federal Reserve. The Fed needs to do a big rate cut in September to reduce the benchmark interest rate to 5 percent, down from about 5.5 percent now. This is about more than bailing out Wall Street; it's about stabilizing- and even reviving - the economy. For the past two years, real estate and manufacturing have been basically frozen due to high interest rates. Some have dubbed this a "rolling recession" since some industries were hard-hit but the overall economy remained strong. The ideal now is a rolling upturn where home and car buying and refinancing pick up again, helping to buoy the economy.

Lower rates will also offer relief to the many maxed-out credit card borrowers.

Comparing the past week to the 1987 stock market crash is overblown. But the slowdown - and recession risk - are real.

- The Washington Post

Heather Long is a columnist and member of The Washington Post's Editorial Board. She was formerly U.S. economics correspondent from 2017 to 2021. Opinions expressed by columnists do not necessarily reflect the views of Vermont News & Media.