Global stock markets started the week with a sharp decline, influenced by concerns over a potential US recession, which Goldman Sachs economists estimate at 25 percent.
On Monday morning, the Dow Jones Industrial Average dropped 945 points, or nearly 2.5 percent, to 38,791.28. This means that if you had $100 invested in a fund tracking the Dow last Friday, it would now be worth around $97.50. The other major indexes, the S&P 500 and the Nasdaq Composite, fell approximately 3 percent and 6 percent, respectively, by mid-morning.
Goldman Sachs’ chief economist, Jan Hatzius, noted that the likelihood of an economic downturn within the next 12 months has increased to 25 percent from 15 percent. This update follows a weaker-than-expected jobs report on Friday, which revealed that US job growth in July was only 114,000 new jobs, below the anticipated 175,000, and unemployment rose from 4.1 percent to 4.3 percent, a level not seen since October 2021.
Despite these concerns, Hatzius stated that the US economy remains generally stable and that the risk of recession is “limited.” He also pointed out that the Federal Reserve has significant room to lower interest rates quickly if necessary. Additionally, the July jobs report, which included many temporary layoffs rather than permanent job losses, may not indicate a broader trend.
A recession is officially defined by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee as “a significant decline in economic activity that is widespread and lasts more than a few months.” This assessment considers various economic indicators, including employment numbers, personal income, sales, industrial production, and consumer spending.
Typically, a recession is associated with a 2 percent decline in GDP, though more severe recessions can see declines of up to 5 percent, according to the International Monetary Fund. Recessions can be triggered by factors such as rising asset prices, supply constraints, misguided economic policies, increasing unemployment, and housing market crashes. Although each recession is unique, they generally last about a year.
The last US recession, known as “The Great Recession,” occurred from December 2007 to June 2009 and was the longest and most severe since 1960. It was caused by a sharp decline in home prices, the collapse of the subprime mortgage market, and the failure of Lehman Brothers, leading to a slow recovery with modest economic growth and high unemployment.
