US economy in recession? What Is impact on global and Indian markets on September 9
The US economy is showing signs of heading towards a recession due to the rising interest rates. Both stock markets and some economists fear that the heavy burden of increased interest rates is weighing down America’s economic growth. However, not everyone agrees with this outlook.
Main Points
Sahm Rule Points to Economic Downturn in the US
According to the Sahm rule, which predicts recessions based on unemployment trends, the rising interest rates have indicated an economic downturn in the US. In July, the unemployment rate in America surged faster than expected, reaching 4.3%, up from 4.1% in June. This jump is a significant indicator of economic trouble. As per the Sahm rule, if the three-month average unemployment rate is 0.5% higher than the lowest three-month average of the previous 12 months, the US is officially in a recession.
Drop in Labor Demand Pushes Unemployment Rate Higher
In June 2022, inflation in the US hit a peak of 9.1%, the highest in four decades. In response to this surge, the Federal Reserve began raising interest rates to control inflation. Between 2021 and 2023, the Federal Reserve increased rates 11 times, bringing the benchmark rate to 5.25%-5.5%, the highest level in 23 years. While these rate hikes have played a crucial role in reducing inflation, which has now dropped to 2.9% as of July, they have also impacted the job market. The rising interest rates have slowed down the demand for labor, resulting in higher unemployment rates.
US Economy Still Growing Despite Job Losses
Despite job losses, the US economy is still showing signs of growth. As of the second quarter of 2024, the economy was growing at an annual rate of 3%. In 2023, it expanded by 2.5%, indicating that other sectors of the economy are doing well. The Federal Reserve has already hinted that it is against tightening the job market any further and could soon start cutting interest rates. Markets are expecting a rate cut of 50-100 basis points by September.
Impact of US Recession on India
A US recession could have ripple effects on India as well. However, the extent of the impact will depend on the severity of the recession. Fears of a recession in the US have already caused a significant drop in the American stock markets, which fell by 2.1% again on Tuesday. On the other hand, India stock market has been performing well, driven by a strong economy. Earlier this week, the World Bank revised its GDP forecast for India’s financial year 2025 from 6.6% to 7%. This boost in economic prospects is expected to increase investment flow into India.
However, a prolonged recession in the US could harm India’s export business, which relies heavily on the American market. This could negatively affect India’s economic growth in the long run. As the US battles recession fears, India must remain vigilant in managing the potential economic fallout.
