Wednesday’s Fed meeting allayed recession concerns and heightened hopes for a soft landing. Friday’s jobs report, unfortunately, stoked recession fears right back up again.
The report, released by the U.S. Bureau of Labor Statistics, revealed that the economy added 114,000 jobs in July, far undershooting expectations. Monthly job gains have averaged roughly 215,000 jobs on average over the past year, and a Reuters poll of economists projected a July gain of 175,000 jobs. The increase, in fact, is the second smallest uptick in more than three years.
The hiring slowdown helped push July’s unemployment rate to 4.3%, up from 4.1% in June to climb to the highest level in three years. It’s worth noting that the unemployment rate remains historically low, although the recent leap brings its three-month average more than half a percentage point above its 12-month low. That threshold, dubbed the “Sahm Rule” after former Fed economist Claudia Sahm, is a widely held indicator among analysts of the onset of a recession.
It’s also worth noting that the Fed’s assertive monetary policy has been having the intended impact of holding back the job market and pulling inflation down. Average hourly earnings in the 12 months through July, for example, are down to 3.6%; that’s the lowest annual earnings gain since May 2021. But the sharp slump and spike in the jobless rate has some observers of the economy wondering if the central bank, which held its rates steady this week and telegraphed a rate cut in September, should be acting with more urgency in reining its policy in.
“July’s top line numbers, which came in below consensus expectations and included the highest unemployment rate since 2021, are likely going to intensify fears that a rate cut in September is too little, too late,” said Odeta Kushi, deputy chief economist at First American Financial Corp.
“On the flip side, the July jobs data increases the likelihood of a larger September rate cut, as odds of a 50-basis-point rate cut in September [are] now up to 70% and the 10-year yield is now down to 3.85%. … While lower mortgage rates will be welcome news for potential home buyers, we also want a resilient labor market. Homebuyers need to feel confident about their jobs to make what is likely to be the biggest financial decision of their life.”
Wells Fargo economists Sarah House and Michael Pugliese noted that while the Sahm Rule was triggered, there are some mitigating circumstances. For one thing, the increase in unemployment was fueled by an influx of people into the worker pool. Consider that in July, new and re-entrants into the labor force accounted for 22 bps of the pickup in the Sahm Rule indicator over the past 12 months. That’s higher than in the first month of each of the past seven recessions.
“This increase in unemployment for the ‘right’ reasons suggests that the crossing of the 0.5-point threshold may not be the surefire sign of recession that it has been in the past,” they wrote in Wells Fargo commentary. “That said, unemployment due to a permanent job loss or completion of temporary work has also risen significantly over the past year, including another increase in July.
“This increase for the ‘wrong’ reasons underscores that even if the threshold for a recession might be somewhat higher this cycle, there has nevertheless been a clear deterioration in labor market conditions.”
