Tonight's nonfarm payrolls data will provide key information on whether the recent rise in unemployment is a one-off blip or the beginning of deeper problems.
The unemployment rate rose significantly in July, ending a trend of only modest increases over the past year. If the unemployment rate continues to rise in August, economists may become more concerned that the United States may already be in recession, or approaching the early stages of a recession. But if the unemployment rate remains unchanged or drops slightly as economists expect, July's weak data may be viewed as a false alarm.
The answer will come at a critical moment as the Federal Reserve prepares to cut interest rates for the first time since the 2020 pandemic.
Fed officials have made it clear that they will cut interest rates at their September meeting. Whether the cut is a conventional 25 basis point or a more significant 50 basis point may depend on the performance of the job market. It is rare for such an important decision to depend on a single piece of data.
Julia Coronado, founder of Macro Policy Perspectives research firm, said: "This is very important. It will set the tone for the Fed, and the Fed's decision will affect global monetary policy and markets." The key is what information the data will show.
The U.S. labor market has cooled significantly over the past few months. Most notably, the unemployment rate rose to 4.3% in July, a significant change from 3.4% in April 2023. The unemployment rate is already higher than pre-pandemic levels, and the recent rate of rise has caused concern among Federal Reserve officials and labor market economists. Federal Reserve Chairman Jerome Powell said in a recent speech:
“A further cooling of the labor market is neither desirable nor welcome.”
A sharp and rapid rise in unemployment is usually seen only during a recession, and last month the Sam's Rule, which foreshadows a recession, was triggered. That's why the recent surge in unemployment has attracted so much attention.
However, Claudia Sahm, the rule's creator and chief economist at New Century Advisors, doesn't think this is a sign of a recession, in part because the rise in unemployment is due to many new entrants to the labor market still searching for suitable jobs.
Still, Sam said the slowdown in labor demand is a cause for concern, even if it doesn't cause an economic collapse, it means potential workers are being excluded. She said the biggest concern right now is the direction of the labor market, and the baseline expectation is not a recession, and there are many reasons to think we haven't reached that point yet. But she added:
“When there is even a slight softening in the labor market, there are still consequences.”
In addition to rising unemployment, there are other signs that the job market is slowing. Job openings are steadily falling and approaching pre-pandemic levels after a surge in 2021 and 2022. Unemployment is rising rapidly, especially among those who have trouble finding work or are more likely to lose their jobs in a weak job market, including Black people and people in their early 20s.
However, many economists believe that the job market has not collapsed, but is returning to normal after experiencing strong labor demand. Many people regard the recent slowdown as a benign adjustment.
There are some signs that July's weak jobs report may be a one-off phenomenon. For example, the number of people who lost their jobs due to temporary layoffs surged in July. When that happens, it usually reverses in the next data. For example, temporary layoffs surged in August 2010 and October 2013, but they also faded quickly. It's worth noting, though, that when surges in temporary layoffs didn't fade quickly, such as in early 1980, the economy did fall into a recession.
In addition, the surge in layoffs in July may be related to severe weather. Although some analysts initially speculated that Hurricane Beryl may have prevented some people from working that month, economists from the Bureau of Labor Statistics and Goldman Sachs said that this may not be the main reason. Temporary layoffs mainly came from the Midwest and California, rather than the hurricane-ravaged South. But hot weather may be part of the reason for this trend.
“The extreme heat in California appears to be associated with some of these layoffs,” said David Mericle, chief U.S. economist at Goldman Sachs.
Even if July isn't an outlier, there are other signs that the job market remains strong. "The baseline scenario is that things will get better," Merrick said, explaining that labor demand is returning to normal, and while it's not as strong as it was in 2022, it's not completely frozen either. "It's more like the strength of 2019 than the strength of 2022."
Although initial jobless claims have risen slightly, they remain at low levels, and WARN notifications, which are used to warn of large layoffs in advance, have not yet increased significantly, according to Goldman Sachs.
For the White House, even a slightly weaker job market could still undercut the brightest part of the Biden administration’s economic record. But there are pros and cons: If a slowing economy translates into faster rate cuts by the Federal Reserve, lower borrowing costs could make voters feel better. Christopher Krueger, managing director of TD Cowen’s Washington research group, said he thinks voters are most concerned about the outlook for interest rates and the recent slowdown in price increases.
"At the end of the day, voters care about prices at the gas pump, at the supermarket and the cost of a Happy Meal," Krueger said.
Article forwarded from: Jinshi Data
