Rising Debt Spurs Recession Fears: Key Indicators to Watch

The U.S. debt level surpassed $35 trillion on July 29, amplifying worries about the economy and a possible recession.

A crucial indicator to monitor is the Sahm Rule, which triggers a recession alert if the unemployment rate climbs 0.5 percentage points above its lowest point in the past year. Currently at 0.43%, it is nearing this critical threshold. If unemployment reaches 4.2% in the upcoming jobs report on August 2, the rule will signal a potential recession.

The anticipated July jobs report, set for release on Friday, predicts an addition of 200,000 jobs and a slight drop in unemployment from 4.1% to 4%. Average hourly wages are expected to rise by 0.2%, reflecting a 3.7% increase year-over-year. Seasonal hiring, particularly in leisure and hospitality, is likely to influence these figures.

Adjustments for July are historically challenging, and any deviations from the forecast could point to stronger hiring trends.

As Wall Street awaits a possible interest rate cut from Federal Reserve Chairman Jerome Powell in September, some experts believe earlier action might be necessary. Former New York Fed President Bill Dudley, who initially supported prolonged high rates, now advocates for an immediate rate cut.

He cites a slowdown in consumer spending, increased car repossessions, and rising loan delinquencies as reasons for his shift. Dudley warns that delaying rate cuts could exacerbate the risk of a recession.