As Joyce Chang of JPMorgan Chase made her opening remarks about whether the U.S. economic forecast was cloudy or sunny, she appeared to need an umbrella the size of the Superdome.
“Month to date, Japan equities is down 20%, the NASDAQ is down 7.5%, bitcoin is down 15% and VIX, the volatility index, is up 100%,” Chang told a Monday session at NCSL’s Legislative Summit.
“Is this just a market correction or is this the sign of what is still to come when we look at the fundamentals in the economy? So, a cloudy day for the markets today, and I don’t think this is over, and the sunshine piece of it, what I would just say is that it is still fundamentally some strong footing that the U.S. is on, but momentum is slowing and expectations still remain very high.”
“Is this just a market correction or is this the sign of what is still to come when we look at the fundamentals in the economy?”
—Joyce Chang, JPMorgan Chase
Chang says Chase still puts the risk of a U.S. recession at 45% for this year.
“Now even a week ago people were telling us that was ludicrous, but that’s been a standing view that we’ve had. It’s just taken a lot longer. And one reason why is the level of government spending,” she says.
But the forecast for a soft landing carrying into 2025? Not so much.
“When we look into 2025, we really do see that it’s almost close to 50-50 whether you could tip into recession, and it’s not so much the growth fundamentals that worry us,” she says. “To me, the bigger concern is that inflation may not come down much more, and it’s also the level of fiscal spending.”
Chang says some people say, “Well, we’re done with the supply shock that we had from COVID and we can get back to the 2% target.”
The problem, she says, is that it’s not just a supply shock, which is something the Federal Reserve could control.
“If it’s just a supply shock, the Fed can act and actually bring this back to target. But the problem is services inflation is running 4%, more than double what it was before the pandemic. And so it’s not just a supply shock, we also have a demand shock. And what is driving the demand shock? Well, some of this is deglobalization. It is that we’re no longer going with the lowest cost of production on where we locate the supply chain.”
Immigration, she said, has helped drive the economy.
“You look at the foreign born versus the native born, you can see that one thing that very few people had forecast two years ago was that you would have the U.S. population 6 million higher,” she says. “When you look at the stronger consumption, the stronger growth, the record low unemployment number, a lot of that is immigration.”
Chang says Chase foresees the Fed reducing interest rates twice in the coming months: once in September and again in November.
“But the question is, is that going to address the demand problem? And these sources of demand are structural in nature: deglobalization and the cost of the energy transition, the industrial policy that has now become the new normal. And there are other risks that we’re looking at, including the restrictions on immigration that are talked about in some of the election rhetoric.”
July’s lower-than-expected jobs numbers, which triggered the current sell-off, might signal that the best behind us. Still, Chang says, “it’s premature to say that we’re headed for a recession.”
Mark Wolf is a senior editor at NCSL.