A US recession could hit by election time unless there are aggressive interest-rate cuts, analyst says

• Analyst Barry Knapp warns a recession looks likely by the November election without aggressive Fed action.
• Small-business-sector employment growth stands below 1%, which can signal a recession, he told CNBC.

The Federal Reserve needs to be urgent and swift with its interest-rate cuts if it wants to avoid a near-term recession, analyst Barry Knapp told CNBC on Wednesday.

Recent labor trends highlight a possibility that the US could face a downturn in just a few months, the Ironsides Macroeconomics managing partner said. His worry stems from unemployment patterns among small business, which are moving in a way that historically signals a looming decline.

"I think that underpinnings of the US economy are really weak," Knapp said. "It wouldn't shock me if we were in recession by election day."

Central to this thinking is the fact that the US employment growth rate — when applied to the small business — now stands below 1% for the private sector, Knapp said.

He added that the last three times this occurred were in 1990, 2001, and 2007, years that either verged on or fell into a recession.

"The small business sector is really struggling," Knapp said. "You see it in the ADP numbers, where small business employment is growing basically one-tenth of a percent, whereas large business employment is growing much more rapidly, like 3%."

Optimism is also a hard thing to find in earnings, Knapp noted.

Although earnings strength did show in the second quarter, these numbers look good when compared to an earnings recession that stretched through the first half of last year.

Meanwhile, estimates for future earnings are on the decline, he said, especially for tech and consumer discretionary sectors.

With labor and earnings fundamentals on shaky ground, Knapp insisted that the Fed must cut more than 25 basis points in September.

Yet, most investors are pricing in just a quarter-point cut, given that some analysts assume the economy is strong enough for a gradual policy pivot.

Knapp disagrees, citing that the unemployment rate will likely rise in August, as implied by Tuesday's Conference Board consumer confidence index.

If labor data does deteriorate this month, that could prompt the Fed to take on a more dovish attitude.

"That will probably be enough to get them to kick off with a [50 basis point cut]," Knapp forecast. "So that's a good start, and maybe we can narrowly avoid a recession. But you know, to me that labor part of the economy just looks really weak here."

He later added: "They really do need to start aggressively to head off the problems in a small business."