A stock market tailspin that began Friday has now spun past the weekend. On Monday, Japanese stocks fell a shocking 12%, their sharpest sell-off since Black Monday in 1987. European stocks plummeted, too. And the S&P 500, a broad measure of U.S. stocks, sank 3%, on top of losses last week.
The cascade began after Friday’s disappointing U.S. jobs report, which showed unemployment rising for the fourth consecutive month and a slowdown in hiring. Those numbers have reignited worries about a U.S. recession, which until recently had faded. It seemed for a while that the Federal Reserve was almost certain to achieve a coveted “soft landing”; now we’re in for some turbulence at the very least.
But it’s worth keeping in mind a few caveats.
Last week’s jobs report was just one snapshot. It has a big margin of error and will be subject to revision. There’s also some debate over whether Hurricane Beryl temporarily depressed numbers. The Bureau of Labor Statistics says it didn’t, but the number of nonagricultural workers alone who reported not being at work due to bad weather reached 436,000. That’s a record high for the month of July.
More than 1 million additional workers reported being able to work only part-time due to weather issues, which is another record for this time of year.
And as long as we’re digging into historical comparisons, note that 4.3% unemployment is a low level compared with rates recorded over the past half-century. The recent trend is in the wrong direction, but if we can stay put where we are, that’s pretty darn good.
Also, while many observers freaked out about the relatively low number of payroll jobs added in July (114,000), we got a similar number earlier this year without much consequence: After all the data revisions came in, employers added a mere 108,000 jobs in April – and then went on to double that (216,000) the following month.
Sure, other recently released economic indicators – including those most often used to assess whether we’re in recession, such as consumer spending – have suggested our ultrahot economy is cooling. But they’ve basically been fine. In fact, gross domestic product growth for the second quarter came in stronger than expected. So there is a reasonable chance that Friday’s employment report was not as bad as it seemed on the surface, and there will be some reversion back to the mean next month.
That’s the optimistic view of the situation. Now let’s talk about what could go wrong.
Other rich countries have been struggling for a while. In fact, the United States has been a happy outlier, with our GDP and employment growth besting even forecasts made before the covid-19 pandemic hit. (American consumers never seemed to notice this, but that’s a different issue.)
But there have been signs of strain even here. Credit card delinquencies have been rising for a while and are now even higher than pre-pandemic levels. This presumably reflects that consumers are continuing to spend, spend, spend even as prices rise, rise, rise. Interest rates are still high, of course, which makes spending on credit especially painful right now.
And despite all the demagogic talk from the left about corporate greed, corporate profits have weakened. In inflation-adjusted terms, they are actually down since their highs early in the Biden administration.
Corporate stock values have seemed oddly disconnected from this profit data and other fundamentals. This was especially confusing given that higher interest rates would normally be expected to depress stock values. Instead, as the Fed raised rates, stocks kept trending upward, even hitting record highs in recent months.
In a sense, then, stock markets perhaps looked too good to be true for a little while. Some investors might have been waiting for the party to end and thought they finally got their cue that it had on Friday. The July jobs report, while not exactly the total catastrophe that some have made it out to be, was disappointing enough for some investors to start selling. (It also didn’t help that the Japanese yen had just appreciated, which probably forced a lot of hedge funds that like to borrow in yen to sell stocks so they could pay back their loans.
The main concern now is that widespread negativity can start to feed on itself. Worry is contagious: Investors dump stocks because of whispers about recession, then companies pull back investments or hiring just in case there’s a recession, then consumers stop spending because they’re nervous about their jobs. That feared recession can become a self-fulfilling prophecy.
All of which is to say that even if the recent data don’t yet doom us to a downturn, enough doom-mongering could. I wouldn’t say the only thing to fear is fear itself. But right now, fear should be among our biggest fears.
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Reach Catherine Rampell at crampell@washpost.com.
