When it comes to the strength of the U.S. economy, August felt like playing a game of “she loves me, she loves me not.” Each data release was a plucked petal, alternating between the possibility of recession and no recession. It’s time to stop the guessing game and put things in context: The economy is cooling—but that is different from crashing.

Much has been made of data releases in recent weeks. Indicators that rarely get market reactions have been generating outside moves. A weaker-than-expected ISM manufacturing survey on August 1 led the S&P 500 index sharply down, for example, while a stronger ISM Services reading stanched some of the bleeding on August 5. Even gross-domestic-product estimates from the Atlanta and Dallas Federal Reserve Banks have been grabbing investors’ attention.

What about important data, like the labor market? A weaker-than-expected payrolls report on August 2 convinced the market that a recession was already in the offing. The unemployment rate rose from 4.1% to 4.3%, triggering the so-called Sahm Rule, a recession indicator based on three-month averages for unemployment.

Economist Claudia Sahm, for whom the rule is named, took to X to note that “there is good reason to view the current rise in the unemployment rate as overstating the recessionary dynamics, at least somewhat.” But even that couldn’t calm the market.

Those fears are long gone after initial jobless claims fell to their lowest level since early July and retail sales climbed 1% in July, the largest increase since early 2023. Judging by the market’s response, it’s as if recession concerns never existed.

It’s the “rotation of worry,” as BMO Capital Markets rates strategist Ian Lyngen dubs it, and he isn’t wrong. Investors show their fickle side every time they overemphasize any one report, especially since the data can change. Monthly payrolls, for instance, get fully revised three times over the course of the year, and the latest revisions—May has been reduced by 2,000 and 54,000 already—have looked quite different from the initial print.

That hasn’t stopped doomsayers from getting a lot of attention. A paper written by Pascal Michaillat of the University of California, Santa Cruz, and Emmanuel Saez of the University of California, Berkeley, asking whether a recession has already started was making the rounds early this past week.

Since 2022, however, the U.S. economy has weathered repeated sour predictions, even as Wall Street’s most trusted recession indicator—the yield curve—remains inverted. The “U.S. economy is doing just fine,” writes Torsten Sløk, chief economist and partner at Apollo Global Management.

He has a point. We’re still seeing healthy growth expectations for the overall economy—estimates hold that gross domestic product should rise by 2% during the third quarter. Consumers are still willing to spend, albeit more prudently, and inflation continues to recede. Those conditions should blunt the trauma from any weak reports.

The bottom line: Not every minor data blip signals that a full-blown crisis is underway. Even if the economy is only lukewarm, that’s not too bad. There are a few cracks and some definite causes for concern, but some good ol’ Fed rate cuts starting in September may well be enough to bandage them up this year.

Enough with the petal plucking. Let’s just enjoy the flowers.

 

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