Nicholas Spiro

Macroscope | Why risk of US recession, not China downturn, is real cause for concern

The Fed’s priority must be to ensure fears of a deeper downturn do not become self-fulfilling, especially given what the US election could unleash

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A cyclist rides past a “Now Hiring” sign posted on a business storefront in San Gabriel, California, on August 21. US figures for the 12 months ending in March showed there were 818,000 fewer jobs than previously reported in the largest downward revision since 2009. Photo: AFP

Nicholas Spiro

Published: 4:30pm, 29 Aug 2024Updated: 5:09pm, 29 Aug 2024

That Chinese economic data is falling short of analysts’ expectations should come as no surprise. Citigroup’s Economic Surprise Index – a gauge that measures how often data comes in above or below expectations – has been in negative territory for China since mid-June. Beijing is still struggling to stabilise the economy amid a prolonged and intractable crisis in the housing market.

Yet, relative to expectations, China’s economy is performing better than it did a year ago, with the index managing to stay in positive territory for most of this year.

Although this says more about how low expectations were to begin with, it is in stark contrast to the surprise index for the United States, which has fallen sharply in the past year and has been in negative territory since May. While it is debatable whether investors were too bearish on China, it has become patently clear they were too optimistic about the US.

In the past several weeks, global markets have been gripped by the fear that the US is sliding into recession. This is not the first time investors have fretted about a sharp downturn in the world’s largest economy. The US was supposed to fall into recession early last year but kept growing at a brisk pace despite the dramatic rise in interest rates to a 23-year high.

However, this time it is the US Federal Reserve itself which is concerned about the risk that it has kept borrowing costs too high for too long. In a pivotal speech at the annual gathering of central bankers in Jackson Hole, Wyoming, on August 23, Fed Chair Jerome Powell said the balance of risks had shifted as the threat of weaker growth outweighed the possibility of a resurgence of inflation.

Powell said the slowdown in the labour market was “unmistakable” and that “the time has come for policy to adjust”. The question is whether the adjustment should have happened sooner.