Experts say soaring unemployment could lead to a recession in the US by 2025. (Source: Medium)

The US unemployment rate rose to a near three-year high in July as hiring slowed sharply, raising concerns that the labor market was deteriorating and could tip the economy into recession, the US Labor Department reported on August 2.

Specifically, the unemployment rate rose to a nearly three-year high of 4.3% in July. That level - up from 4.1% in June and up from a five-decade low of 3.4% in April last year - sets the stage for an interest rate cut at the Federal Reserve's next meeting in September.

A recession coming?

The spike in unemployment “leads to a recession by 2025,” said Gary Clyde Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics.

"I expect the Federal Reserve to start cutting policy rates in September and continue cutting at subsequent meetings. That response could lead to a recession," he stressed.

The stock market immediately reacted to fears of a recession.

The Dow Jones Industrial Average fell more than 700 points — nearly 2% — in afternoon trading on August 2.

The S&P 500 index fell 2% - as Wall Street banks called for more and larger rate cuts than expected so far.

Economists at Goldman Sachs and Citigroup have also revised their expectations for Fed rate cuts, now calling for a half-point cut in September and November and a quarter-point cut in December.

People only start worrying about a recession when they're already in one, said Andrew Hollenhorst, an economist at Citigroup. "Simply put, when you see unemployment rising, that's when temporary layoffs become permanent," he said.

Meanwhile, Mr. Ryan Sweet, chief economist of Oxford Economics, found that when consumers spend money, the US economy will grow.

“Overall, Americans have stable incomes, but the number of middle- and low-income households has increased significantly,” he said.

"A recession is not coming, at least not right now"

But not everyone agrees with the scenario that the world's largest economy is on the verge of recession.

Mr. Jason Furman, former economic advisor to the White House, now a professor at Harvard University, found that, apart from the unemployment rate, most other indicators of the US economy are still growing, some even increasing strongly.

Nancy Vanden Houten, chief economist at Oxford Economics, also firmly asserted: “We do not see a recession, even though the stock market is red hot.

The jobs report was weaker than most economists expected and we don't dismiss signs of a weaker labor market. But there are still encouraging signs."

There are a lot of people looking for jobs — about 420,000 people joined the workforce last month. These are new entrants to the workforce, and that's a good thing, economist Vanden Houten pointed out.

“Moreover, the recession before the Covid-19 pandemic had other catalysts that led to a recession, including very high household debt and mortgages that homeowners could not keep up with – a situation that is not present in the current one,” explains the chief economist at Oxford Economics.

Experts also believe that a recession scenario will not happen, at least not right now. Accordingly, the next 6 months will be an important time to predict the health of the world's largest economy.

Mr. Eric Diton, Chairman and CEO of Wealth Alliance Fund - one of the funds rated by Forbes magazine as the best in the US in 2023 - assessed that looking at the stock market in the last months of the year, the hottest keywords are energy and oil.

Mr. Eric Diton commented: "Oil, natural gas, pipeline infrastructure, and energy stocks will be good growth sectors. Because now the demand for energy will increase very high due to the emergence of artificial intelligence (AI)".

All eyes are now on the August jobs report for a clearer picture of the US job market and economy . (Source: Bloomberg)

Fed officials are also optimistic about the potential of the world's number one economic power.

Recently, Mary Daly, President of the San Francisco Fed, said that many details in the employment data reinforce the belief that America is only slowing down, not falling into the abyss.

Regarding the alarming rate of delinquency on auto loans and credit cards, the Fed said the figures are not yet at levels related to the 2008 global financial crisis.

All eyes are now on the August jobs report for a clearer picture of the US job market and economy.

Until then, economists will watch weekly jobless claims to get a sense of the real situation, said Mary Daly.

Bad signal for Democrats

However, the latest jobs data will impact the upcoming US presidential election.

Former President Donald Trump's campaign said the July jobs report was "further evidence that incumbent President Joe Biden's economy is failing Americans," the AP news agency reported.

Any weakening of the economy would be a bad sign for Democrats, Vanden Houten said.

"Even though President Joe Biden is no longer running, Vice President Kamala Harris is still part of the Democratic Party and this could negatively impact her," Mr. Vanden Houten worried.

The Wall Street Journal also published an article on August 6 stating that the recent economic instability risks reinforcing voters' views that the world's economic "locomotive" is unstable, creating an opportunity for former President Donald Trump's election campaign to gain the upper hand.