Will there be a recession in the United States or not? That is the question

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By TP

The first days of August were complicated for the United States. A series of economic events shook investors' confidence in its financial stability, causing fears of a recession to rekindle. These turbulences began after the Bureau of Labor Statistics published that unemployment in the United States rose to 4.3% in July, its highest level in the last 3 years.

The negative sentiment gained further strength after the head of the US Federal Reserve (Fed), Jerome Powell, ruled out the possibility of cutting annual interest rates until September. Currently, they are in the range of 5.25% and 5.50%. In this context, the question that arose among investors is whether there is still room to stimulate economic growth, given the alarming data. The answer to this question was reflected in the drop of the major stock market indices.

Since the United States is the main financial power, the fear of an economic slowdown contributed to the collapse of the Asian and European stock markets. Added to these data was the end of the Japanese yen carry trade and decisions by the United Kingdom Central Bank. As reported by BitcoinDynamic, the result of these events caused a perfect storm that will be remembered as “Black Monday.” Amid speculation about a possible rate cut, some analysts are cautious when talking about a recession and warn that more data is needed to draw conclusions. Others, meanwhile, have a negative view and believe that all roads lead to a slowdown in the economy. The most common definition for talking about a recession in the United States is when economic activity or gross domestic product declines for two consecutive quarters.

Positive view of the situation

Some analysts argue that the United States will not enter a recession and claim that It's not time to panic. On this subject, Victor Dergunov, head of investment group The Financial Prophet, comments: “Many US stocks have fallen significantly, which creates buying opportunities as valuations are attractive and earnings remain solid.”

Standard & Poor's 500 index so far in 2024. Source: TradingView. Although she acknowledges that the July employment report showed worrying trends, “it is not a reason to panic” since “the Fed is likely to cut rates by 50 basis points in September, which is positive for stocks.” Kristina Hooper, global market strategist at Invesco, believes that market corrections “are common” and points out that recession indicators such as lending and high levels of corporate debt have not yet been activated. In her opinion, unemployment “is still at low percentages relative to historical data.” She also said:

“We think markets are overly concerned about recession. While we think the Fed has increased recession risks by not cutting in July, we still think the US labor market is in relatively good shape and employers seem reluctant to lay off staff,” said Kristina Hooper, global market strategist at Invesco.

Data from the Conference Board, a nonpartisan, nonprofit research organization, support the perspective of those analysts. Although they indicate an economic slowdown, they do not show signs of an imminent recession. Specifically, this Leading Economic Indicator (LEI) fell by 0.6% in July. This downward trend, which began in mid-2022, which increases concerns about an economic stagnation.

Before continuing, it is important to clarify that the LEI is composed of several indicators that anticipate the behavior of the economy and are a reliable source for investors. A drop in the LEI suggests that the economy may be slowing and that there is a greater risk of recession. In the six-month period ending in July 2024, the LEI decreased by 2.1%, an improvement from the 3.1% decline recorded between July 2023 and January 2024. In this regard, Justyna Zabinska-La Monica, manager of cycle indicators at the Conference Board, detailed through a statement that “the LEI continues to fall month by month, but the half-year annual growth rate no longer indicates a future recession.”

Negative outlook on the situation

Other analysts have a different opinion and have a negative projection for financial markets. Although they do not know how a recession could impact the entire world, they argue that the trend is going in that direction. One of them is Avi Gilburt, CEO of the firm ElliotWaveTrader, who maintains: “We are probably going to be looking at a very prolonged bear market, it could be 10 or 20 years.” Along those lines, Claudia Sahm, former member of the Federal Reserve (Fed), said that “we are not in a recession now, but the momentum is in that direction” and stressed: “A recession is not inevitable and there is a substantial margin to reduce interest rates.” These negative views of the situation are based on the fact that the decrease in employment, in a context of business weakness, increases the likelihood of a reduction in consumptionwhich could lead to a recession. Meanwhile, Warren Buffett, one of the world's largest investors and CEO of Berkshier Hathaway, sold 49% of his stake in Apple, as highlighted in his report for the second quarter of 2024. Considering his long-term investment approach, these moves made by Buffett generate uncertainty about the bullish outlook that is in the financial market.

How would a recession impact the bitcoin price?

In a chaotic environment, the digital currency created by Satoshi Nakamoto could act as a safe haven for investors.

While it is true that, like stocks, bitcoin (BTC) is considered a risk asset, there are specific issues that position it as a store of value. For example, this currency has inherent scarcity since there can never be more than 21 million bitcoins. A big difference with fiat money, which is devalued every time there is inorganic issuance by central banks. After the halving, the event of reduction of the issuance of this asset that occurred in April 2024, The market has bullish prospects for the remainder of this year.

Thus, with a more limited supply and increasing demand, it is possible that the price of this asset will rise. Historically, the BTC price entered a bullish rally 150 days after this event. However, it should also be mentioned that BTC's narrative as a safe haven has not yet been discovered by most investors. The asset is still in an early phase of adoption, although its value is beginning to be recognized. An example is what is happening with gold, which in this context reached the price of 2,508 per ounce, its all-time high (ATH). For its part, BTC, which is considered “digital gold”, remains below its all-time high since March 2024.