Experts describing the world’s largest economy have in recent years opted for two words: “remarkably resilient”.
Even as interest rates soared to a 23-year high, American businesses continued to hire, consumers to spend and the economy to grow while defying economic gravity.
But in days the feelgood factor has evaporated, prompting traders to ask: is the party over?
Global stock markets are in free fall, the Wall Street fear gauge has hit a four-year high and money markets are betting the Fed will launch an emergency rate cut.
As markets opened in the US, the S&P 500 index had fallen by 3.4pc and the tech-focused Nasdaq by 4.3pc.
It comes just as the US election battle between Kamala Harris and Donald Trump is intensifying, potentially posing a fresh challenge for the Democratic vice president as she seeks to defend her party’s record in office.
The sharp change has been “peculiar” and raises big questions for the US outlook, says Dan Boardman-Weston, chief executive at BRI Wealth Management.
“The data from the US has been weakening for some time, but the narrative has very much been soft landing. That just seems to have completely changed,” he says.
Analysts had largely accepted the US economy would experience an extremely rare so-called soft landing in the face of surging interest rates – meaning it would gradually slow but avoid a recession.
The Federal Reserve insisted only a week ago that it was still too early to start lowering borrowing costs after the most aggressive round of tightening in decades.
But official figures showed on Friday that the growth in jobs had slumped to 114,000, far below an average of 215,000 over the last 12 months.
Unemployment meanwhile rose by 0.2 percentage points to 4.3pc, triggering an economic alarm bell known as the Sahm rule. This predicts that a recession is imminent when the unemployment rate rises by at least 0.5 percentage points from a low point within a year.
“I think there’s a strong possibility there’ll be a recession,” says Boardman-Weston.
Such fears are echoed by Frédérique Carrier, head of Investment Strategy for RBC Wealth Management in the British Isles and Asia. “Recent economic data suggests that the labour market isn’t just cooling, it may be getting cold,” she says.
Carrier also highlights that surveys suggest the availability of jobs “not only being notably lower than in 2019, but also dropping at a pace on par with past recessions”.
These factors may reflect that the pain of high borrowing costs is finally starting to kick in, according to Boardman-Weston.
“The impact of rate cuts or rises takes quite some time to filter through to the real economy. What we are starting to see now is the consequence of moving interest rates from next to nothing to 5.25pc starting to impact on Main Street,” he adds.
The Fed began raising its benchmark rate from a target range of 0-0.25pc in March 2022. It last increased this to 5.25 to 5.50pc in July last year.
Traders are now pricing in five quarter-point cuts this year, having recently only expected one.
The market turmoil and looming threat of recession could be bad news for Harris, who is trying to pry the poll lead from Trump with only three months to go before the presidential election.
“If the market continues to fall and the economy continues to weaken, that definitely gives Trump and Vance some ammunition to say, ‘we are stronger on the economy, they’ve messed it up’. I think that resonates with people,” Boardman-Weston says.
Jonas Goltermann from Capital Economics also warns that the incumbent is usually “on the hook for the economy”, which is a boon when it does well but problematic if it struggles.
He points to the UK election as an example of where the Opposition benefited from years of struggling economic performance.
However, Harris’s record may not be as tainted if the US economy falls into recession, he adds, given Joe Biden was president rather than her.
“Polling suggests she is not getting the blame for inflation in the way Biden was. It is plausible that she might not get as much of the blame for more of a slowdown if that does materialise in the next few months,” Goltermann says.
“I think the Democrats’ counter argument will be that as the economy is slowing you want a safe pair of hands at the steering wheel, and Trump is not a safe pair of hands.”
Recession fears in the US prompting a flight from risky assets come amid growing unease that tech companies riding a wave of AI hype are vastly overvalued.
It emerged over the weekend that Warren Buffett has dumped half of Berkshire Hathaway’s stake in Apple in a selling spree amounting to $76bn (£59bn) of stocks.
Meanwhile, stock markets globally are experiencing a meltdown. Japanese stocks suffered the worst day since 1987, prompting trading to be suspended.
Europe and America have followed suit in a major worldwide rout.
Many investors are reluctant to take market turmoil and weak data as gospel dictating that a recession in the world’s largest economy is imminent, however.
Goldman Sachs raised its assumption that the US will fall into recession to 25pc, an increase of 10 percentage points.
The investment bank says the central bank has plenty of room to cut interest rates “and would surely be quick to support the economy if necessary”.
Analysts at UBS similarly say their “base case remains that the US economy will avoid a recession”.
“Households are in good financial shape overall, with positive real income growth, average debt servicing costs that remain low relative to historical averages, and aggregate net wealth that has increased 37pc since the start of the pandemic,” they add.
Kamala Harris’s election chances may well hinge on upbeat predictions proving correct.
