JPMorgan has adjusted its probability of a U.S. recession this year to 35%, up from 25% in its midyear outlook, the Wall Street giant revealed in a Wednesday report.

In the note, JPMorgan economists discussed the weakening U.S. labor market, with recent data indicating a slowdown in employment gains and initial signs of labor shedding.

This softening in labor demand, coupled with moderating wage inflation, suggests a reduction in labor market pressures. U.S. wage inflation is slowing in a manner not seen in other developed markets, aligning with sustained productivity gains to bring unit labor costs in line with the Federal Reserve's inflation target.

Economists argue that easing labor market conditions and the resulting reduction in inflationary pressures increase confidence that service price inflation will decline, supporting the case for a more significant policy adjustment from the Fed. They anticipate the Fed will lower policy rates by at least 100 basis points by the end of the year.

Economists also note that while global activity data remains solid, there are emerging signs of caution within the private sector.

“The latest business surveys suggest a loss of momentum in global manufacturing and in the Euro area, weak links in the expansion that we have expected to lift this year,” the note states.

Despite these concerns, the underlying vulnerabilities typically associated with a recession, such as sustained profit margin compression or credit market stress, are not currently present.

JPMorgan's revised recession probability is based on the expectation that the Fed will respond to the shifting growth and inflation risks with an early easing cycle.

“An early easing cycle that responds to shifting risks on growth and inflation—but not the realization of a recession—likely improves the outlook for growth looking to next year, economists explained.

“While recognizing additional uncertainties related to the political backdrop, we have not altered our assessment of the probability of a recession by the end of next year, which remains at 45%.”

Moreover, JPMorgan observes that the easing of labor market conditions and moderating wage inflation seen in the U.S. are not evident elsewhere.

The bank believes that the impact of Fed policy changes on other economies is limited without a synchronized shift in fundamentals. As such, "there is a good chance that the shift away from gradualism we now expect from the Fed will not be reflected more broadly,” economists said.

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