Why JP Morgan sees growing risks despite falling inflation

On August 15, JP Morgan Research said the probability of a U.S. and global recession in 2024 has reached 35%, up from the mid-year estimate of 25%. While inflation appears to be moderating, signs of weaker economic growth and a weaker labor market than expected are the main reasons for this increased probability. Here's a closer look at the factors driving these worries and what they could mean for interest rates and the overall economy.

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The July employment report was a key indicator of the changing economic landscape. The report showed that the unemployment rate rose for the fourth consecutive month, suggesting that the labor market, which had remained largely stable over the past year, is starting to soften. This weakening in labor demand has prompted JP Morgan to reconsider its growth forecast as there are now greater risks of recession.

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Bruce Kasman, chief economist at JP Morgan, highlighted the factors that contributed to this updated forecast. “News from the US points to a stronger-than-expected slowdown in labor demand and early signs of job cuts,” Kasman explained. In addition, global manufacturing and the eurozone have lost momentum – areas that were previously expected to drive growth.

However, Kasman pointed out that the main recession risks – such as a sustained decline in profit margins, stress in credit markets and shocks in energy or financial markets – are still absent. These factors led JP Morgan to raise its recession probability assessment only slightly to 35%.

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Looking ahead, JP Morgan puts the probability of a recession by the end of 2025 at 45%. Although the political landscape remains uncertain, the overall assessment of long-term recession risks remains stable.

Inflation, a major problem last year, has cooled, forcing a reassessment of the Federal Reserve's interest rate strategy. JP Morgan now believes there is a 30% chance the Fed will keep interest rates high for an extended period, up from 50% just two months ago. This shift reflects a changing economic environment in which strong supply and weakening labor demand are reducing inflationary pressures.

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Kasman explained: “The modest increase in our assessment of recession risk contrasts with our more substantial reassessment of the interest rate outlook.”

It is important to note that this expected rate cut may not be implemented globally. The risk shift on inflation appears to be concentrated in the US, and other economies may not see the same policy adjustments. “Our experience is that the transmission of Fed policy changes to other economies is limited unless there is a synchronized change in macroeconomic fundamentals and financial market conditions,” Kasman noted. “Therefore, there is a good chance that the move away from gradualism that we now expect from the Fed will not be implemented more broadly.”

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Although the likelihood of a recession has increased, it is wise to consider the broader economic context. While risks are increasing, particularly in the labor market, other recession indicators are not pointing to red numbers.

Despite the risks of recession, there are still many positive things happening in the global economy. Eric Freedman, chief investor at US Bank Wealth Management, says: “We still think this is a very positive investment environment. The slowing economy was clearly predictable. If we felt there was a structural economic change underway, we would come to a different conclusion.”

As always, it is important to plan carefully in times of economic uncertainty. If you are concerned about the impact of these developments on your financial future, you can seek personalized strategies from a financial advisor to help you protect your wealth and achieve your long-term goals.

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This article 35% probability of recession in 2024: Why JP Morgan sees growing risks despite cooling inflation originally appeared on Benzinga.com

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