Evelyn Reynolds

Job growth in the U.S. slowed much more than expected during July and the unemployment rate ticked higher, the Labor Department reported Friday.
Nonfarm payrolls grew by just 114,000 for the month, down from the downwardly revised 179,000 in June and below the Dow Jones estimate for 185,000. The unemployment rate edged higher to 4.3%, its highest since October 2021.

Average hourly earnings, a closely watched inflation barometer, increased 0.2% for the month and 3.6% from a year ago. Both figures were below respective forecasts for 0.3% and 3.7%.
Stock market futures added to losses following the report while Treasury yields plunged.
The labor market had been a pillar of economic strength but has recently shown some trouble signs, and the July payrolls increase was well below the average of 215,000 over the past 12 months.
“Temperatures might be hot around the country, but there’s no summer heatwave for the job market,” said Becky Frankiewicz, president of the Manpower Group employment agency. “With across-the-board cooling, we have lost most of the gains we saw from the first quarter of the year.”
From a sector standpoint, health care again led in job creation, adding 55,000 to payrolls. Other notable gainers included construction (25,000), government (17,000) and transportation and warehousing (14,000). Leisure and hospitality, another leading gainer over the past few years, added 23,000.

The information services sector posted a loss of 20,000.
While the survey of establishments used for the headline payrolls number was discouraging, the household survey was even more so, with growth of just 67,000, while the ranks of the unemployed swelled by 352,000. The labor force also contracted by 214,000, though the participation rate as a share of the working-age population actually edged higher to 62.7%.

The report adds to mixed signals recently about the economy and with financial markets on edge about how the Federal Reserve will respond.
Though markets on Wednesday cheered indications from the Fed that an interest rate cut could come as soon as September, that quickly turned to trepidation when economic data Thursday showed an unexpected jump in filings for unemployment benefits and a further weakening of the manufacturing sector.
That triggered the worst sell-off of the year on Wall Street and renewed fears that the Fed may be waiting too long to start cutting interest rates. Easing wage gains could help policymakers feel more confident that inflation is progressing back to their 2% goal.

The rise in the unemployment rate brings into play the so-called Sahm Rule, which states that the economy is in recession when the three-month average of the jobless level is half a percentage point higher than the 12-month low. In this case, the unemployment rate was 3.5% in July 2023 before it began its gradual ascent. The three-month unemployment rate average moved up to 4.13%.
“The latest snapshot of the labor market is consistent with a slowdown, not necessarily a recession,” said Jeffrey Roach, chief economist at LPL Financial. “However, early warning signs suggest further weakness.”
Roach pointed out that the ranks of those working part-time for economic reasons jumped to 4.57 million, an increase of 346,000 to the highest level since June 2021.
An alternate measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons surged 0.4 percentage point to 7.8%, the highest since October 2021.
Long-term unemployment also ticked higher. Those reporting being out of work for 27 weeks or more totaled 1.54 million, the most since February 2022.
Wall Street had been bracing for modest gains from the July payrolls report, in part over concerns about growth but also from residual impacts from Hurricane Beryl. The storm badly damaged parts of Texas including the Houston metropolitan area. 
Despite some anxiety over the state of economic growth, Fed Chair Jerome Powell on Wednesday expressed confidence about the “solid” economy and said easing inflation data is raising confidence that the central bank can cut soon. 
Markets have fully priced in a rate cut of at least a quarter percentage point at each of the three remaining Fed meetings this year. Odds are rising that the Fed even may go beyond traditional quarter point reductions.
“While the labor market has remained remarkably resilient over these past two years of elevated interest rates, it’s important for the Federal Reserve to stay ahead of any further labor market slowing by proceeding with its expected September rate cut,” said Clark Bellin, chief investment officer at Bellwether Wealth. More

The nonfarm report Friday from the Bureau of Labor Statistics is forecast to show payroll gains of 185,000 in July, down from 206,000 in June.
Job gains have averaged 203,000 a month for the first half of 2024 while the unemployment rate has drifted higher.
Average hourly earnings are forecast to show a 0.3% increase on the month and 3.7% from year ago. If the latter is correct, it will represent the lowest earnings increase since May 2021.

People line up as they wait for the JobNewsUSA.com South Florida Job Fair to open at the Amerant Bank Arena on June 26, 2024, in Sunrise, Florida. 
Joe Raedle | Getty Images

The U.S. labor market may have cooled some in July, as a gradual slowdown in the economy and Hurricane Beryl are expected to have taken some of the steam out of hiring.
Still, even if the Labor Department’s nonfarm payrolls report for July, to be released Friday at 8:30 a.m. ET, does indicate a weaker jobs picture, the decline is expected to be only incremental and in keeping with the type of gentle downshift the Federal Reserve is looking to engineer.

“If the Fed was going to manufacture the soft landing, this is probably what it was going to look like,” said Mike Reynolds, vice president of investment strategy at Glenmede. “You’re seeing just modest on-the-margin weakness in the labor market that [isn’t likely to] spiral out of control into a negative feedback loop.”
Indeed, the report from the department’s Bureau of Labor Statistics is forecast to show payroll gains of 185,000 on the month, down from 206,000 in June, with the unemployment rate holding at 4.1%, according to the Dow Jones consensus estimate. Job reports for the past year and a half have routinely beaten the consensus.
But some economists think the report could be on the light side; Goldman Sachs expects Beryl, which ravaged large parts of Texas, particularly Houston, to pull down the jobs number by 15,000. The firm thinks the total payroll gain will be more like 165,000. Citigroup projects an even lower number — 150,000 on payrolls and a tick higher in the unemployment rate to 4.2%.
Should the unemployment rate keep climbing, it could raise fears that the so-called Sahm Rule is in danger of being triggered. The rule has observed without fail that when the unemployment rate over a three-month period averages half a percentage point higher than the 12-month low, the economy is in recession. A year ago, the jobless level as at 3.5% before it started climbing.

Optimism at the Fed

Job gains have averaged 203,000 a month for the first half of 2024, while the unemployment rate has drifted higher as more workers have come into the labor force and the level of those considered unemployed but looking for work or temporarily laid off has hit its highest level since October 2021.

Fed Chair Jerome Powell on Wednesday noted that the previous disparity between supply and demand in the labor market has come into near-balance. Open jobs now outnumber available workers just 1.2 to 1, down from 2 to 1 a few years ago as inflation roared.

Should the factors continue to come into balance and other inflation indicators show progress, Powell strongly hinted that an interest rate cut could be coming in September.
“Our confidence is growing, because we’re getting good data,” he said at a news conference following the Fed’s policy meeting. “Frankly, the softening in the labor market conditions gives you more confidence that the economy’s not overheating.”
Markets will be watching Friday’s numbers for confirmation that Powell’s view on the labor market is accurate — and that the Fed isn’t overconfident and waiting too long to start lowering rates.
There has been a growing chorus on Wall Street for the Fed to start easing now that most indicators show that the inflation rate is only a short distance from the central bank’s 2% goal. DoubleLine CEO Jeffrey Gundlach, for instance, told CNBC on Wednesday that he thinks the economy already is teetering on recession.
“When we look back at today, …. I kind of believe that we will say that we were in recession in September 2024,” he said.

Eyes on earnings

The Fed at its meeting voted to hold its benchmark overnight borrowing rate in a range of 5.25%-5.5%, where it has been for the past year.
Markets rallied on the news but gave back those gains Thursday following news that unemployment claims rose last week and the manufacturing sector slumped further into contraction.
“By holding off on cutting interest rates today, the Federal Open Market Committee is betting the labor market is strong enough to wait until the fall for confirmation that inflation is returning to 2%,” said Nick Bunker, Indeed Hiring Lab’s economic research director for North America. “Let’s hope it pays off.”
As always, markets also will have eyes on the average hourly earnings portion of the report for signs of underlying inflation.

The forecast is that earnings rose 0.3% on the month and 3.7% from year ago. If the latter is correct, it will represent the lowest earnings increase since May 2021.
“Even if wage pressures were to unexpectedly remain ‘stuck’ or slightly re-accelerate in this report, we think that the progress the Fed has made on inflation thus far means that there should still be an opportunity for the Fed to cut rates in September so long as subsequent data releases (eg July CPI) cooperates,” said BeiChen Lin, investment strategist at Russell Investments.

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Markets are pricing in an aggressive path for interest rate cuts starting in September with a quarter percentage point reduction, which would be the first since the early days of the Covid crisis.
“The Fed needs to start that process back gradually to normal, which means gradually reducing interest rates,” said economist Claudia Sahm, known for devising a rule that uses unemployment as a yardstick for recessions.
DoubleLine CEO Jeffrey Gundlach also thinks the Fed is risking recession by holding a hard line on rates.

Federal Reserve Chairman Jerome Powell arrives to speak at a news conference following a Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Board Building on July 31, 2024 in Washington, DC. 
Andrew Harnik | Getty Images

If the Federal Reserve is starting to set the table for interest rate reductions, some parts of the market are getting impatient for dinner to be served.
“What is it they’re looking for?” Claudia Sahm, chief economist at New Century Advisors, said on CNBC just after the Fed concluded its meeting Wednesday. “The bar is getting set pretty high and that really doesn’t make a lot of sense. The Fed needs to start that process back gradually to normal, which means gradually reducing interest rates.”

Known for formulating the Sahm Rule that uses changes in the inflation rate to gauge when recessions occur, Sahm has been clamoring for the central bank to start easing monetary policy so it doesn’t drag the economy into recession. The rule states that when the three-month average of the unemployment rate is half a percentage point above its 12-month low, the economy is in recession.
The 4.1% jobless level is only a short distance from triggering the rule, and Sahm said the Fed’s insistence on holding short-term interest rates at their highest level in 23 years is endangering the economy.
“We don’t need a weak economy to get that last little bit out of inflation,” she said. “We do not have to be afraid of a good economy. If the inflation job is done, or we’re on that glide path, it’s OK, the Fed can start stepping aside.”
Asked about the Sahm Rule during his post-meeting news conference, Fed Chair Jerome Powell called it a “statistical regularity” that doesn’t necessarily hold true this time around as the jobs picture remains strong and the pace of wage gains decelerates.
“What it looks like is a normalizing labor market, job creation and a pretty decent level of wages going up at a strong level but coming down gradually,” he said. “If it turns out to … show something more than that, then we’re well-positioned to respond.”

Cautious approach

Markets, though, are pricing in an aggressive path for rate cuts starting in September with a quarter percentage point reduction, which would be the first since the early days of the Covid crisis.
After that, markets expect cuts in November and December, with an about 11% probability assigned to the equivalent of a full percentage point lopped off the fed funds rate by year end, according to the CME Group’s FedWatch gauge of 30-day fed funds futures contracts.
Instead of starting to take its foot off the brake, the Fed on Wednesday said it is keeping its overnight borrowing rate in a range between 5.25%-5.5%. The post-meeting statement did note progress made on inflation, but also reiterated that policymakers on the rate-setting Federal Open Market Committee need “greater confidence” that inflation is heading back to 2% before they will be ready to lower rates.
DoubleLine CEO Jeffrey Gundlach also thinks the Fed is risking recession by holding a hard line on rates.
“That’s exactly what I think because I’ve been at this game for over 40 years, and it seems to happen every single time,” Gundlach said, speaking to CNBC’s Scott Wapner on “Closing Bell.” “All the other underlying aspects of employment data are not improving. They’re deteriorating. And so once it starts to get to that upper level, where they have to start cutting rates, it is going to be more than they think.”
In fact, he thinks the Fed could end up slashing rates by 1.5 percentage points over the next year, a pace that’s more aggressive than the policymakers charted when they last updated the “dot plot” of individual projections.
Gundlach figures that the consumer price index will be below 3% soon, making real rates, or the difference with the fed funds rate, particularly high.
“If you have a positive real interest rate that’s even one and a half percent, that would suggest you have 150 basis points of room to cut rates without even thinking that you’re being excessive about it,” he said. “I think they should have cut today, quite frankly.”

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