Is the US facing a recession? Is what happened overnight on the cryptocurrency market a sign of fear of such a scenario?
Recession, what is it?
Recession is a term that often appears in the media. What exactly does it mean? It is a macroeconomic phenomenon that involves a significant slowdown in the pace of economic growth. Most often, this means a decline in gross domestic product (GDP). Economists consider a recession to be a fact when GDP declines for at least two consecutive quarters.
What’s happening in the US right now? According to the latest estimate, US GDP in Q2 2024 grew by 2.8% q/q. This was a better result than expected (2.0%). Especially since the data for Q1 2024 was very disappointing (1.4%).
So isn’t the US facing a recession and making this article pointless? Not entirely. The unemployment rate is worrying, rising to 4.3% in July (up from 4.1% in June). It hasn’t been this bad since October 2021. Nonfarm payroll employment increased in the US in July, but by just 114,000 people. Economists had been expecting a much higher number – 175,000.
Sahm’s Rule
Of course, this is still just one set of data. Not enough to start fearing a recession. Except that at this point economists are reminding us of the so-called Sahm rule (named after economist Claudia Sahm), according to which an increase in unemployment heralds a recession. More precisely: when the average unemployment rate over a three-month period exceeds the previous year’s minimum by at least 0.5 percentage points, a recession occurs (as it is now).
Let me reassure you right away: just because something worked a few times doesn’t mean it will work again.
An increase in unemployment can of course herald a decline in GDP for the simplest reason. Fewer workers will generate less GDP. More people out of work also means growing fears of continued high consumption. If my neighbor lost his job today, I could lose it tomorrow, John Smith might start thinking.
So it’s not all rosy. But for bitcoin investors, it’s not necessarily as bad news as you might think.
Interest rates should be cut now!
There are already voices suggesting that the Fed should start cutting interest rates in July. The Federal Reserve authorities have not done so. Instead, it seems almost certain that Jerome Powell and his colleagues will pick up the scissors in September. The unemployment data will force them to make a cut. The only question is whether it will be by 25 basis points or even 50.
The start of the rate cut cycle will cause cryptocurrencies to start rising in price. Just like many other assets. The reason will be that “cheap” money will be poured onto the floor.
Of course, the above is not 100% certain. If it turns out that the US economy “falls ill”, GDP starts to fall, recession begins, then it could be… different. Cyclicality and lower interest rates will continue to speak in favor of further increases in bitcoin. Against: a more serious crisis in the US (and therefore more countries).
