People line up as they wait for the opening of the JobNewsUSA.com South Florida Job Fair at Amerant Bank Arena on June 26, 2024, in Sunrise, Florida.
Joe Raedl | Getty Images
The U.S. labor market may have cooled slightly in July as a moderate economic slowdown and the effects of Hurricane Beryl appear to have weakened hiring momentum.
Still, even if the Labor Department’s July nonfarm payrolls report, due at 8:30 a.m. ET on Friday, shows a worsening employment situation, the decline is expected to be only gradual and in line with the type of gradual recession the Federal Reserve is aiming for.
“If the Fed was trying to engineer a soft landing, this is probably how it was supposed to go,” said Mike Reynolds, vice president of investment strategy at Glenmade. “We’re seeing a little bit of weakness in the labor market, but [isn’t likely to] It gets out of control and you get into a negative feedback loop.”
In fact, the Bureau of Labor Statistics reported that the Dow Jones consensus estimate is for payrolls to increase by 185,000 from the previous month, down from 206,000 in June, and for the unemployment rate to remain at 4.1%. Employment reports over the past year and a half have consistently beaten consensus estimates.
But some economists think the report may be optimistic. Goldman Sachs expects Hurricane Beryl, which battered much of Texas, especially Houston, to reduce payrolls by 15,000. The firm thinks the gain will be more like 165,000. Citigroup is predicting an even lower figure: 150,000 jobs and a slight increase in the unemployment rate to 4.2%.
If the unemployment rate continues to rise, that could raise concerns that the so-called thumb rule, which credibly determines that the economy is in recession when the three-month unemployment rate is 0.5 percentage points higher than the 12-month minimum, will be triggered. A year ago, the unemployment rate was 3.5 percent before it began to rise.
Federal Reserve Optimism
While job gains in the first half of 2024 are averaging 203,000 per month, the unemployment rate is trending up as more workers join the labor force, and the level of people who are unemployed but looking for work or described as temporarily laid off is at its highest since October 2021.
Fed Chairman Jerome Powell said Wednesday that the historical imbalance between supply and demand in the labor market is now roughly balanced: There are now 1.2 times as many job openings as there are available, down from double the number a few years ago when inflation was surging.
If these factors continue to balance and other inflation indicators show improvement, Powell strongly hinted at the possibility of a rate cut in September.
“We’re feeling more confident because we’re seeing good data,” he said at a news conference after the Fed’s policy meeting. “Frankly, we’re feeling more confident that the economy is not overheating because of softening labor market conditions.”
The market will be closely watching Friday’s data to ensure that Chairman Powell’s views on the labor market are accurate and that the Fed is not getting overconfident and waiting too long to start cutting rates.
With most indicators showing inflation just a hair away from the central bank’s 2% target, there are growing calls on Wall Street for the Fed to start easing monetary policy. DoubleLine CEO Jeffrey Gundlach, for example, told CNBC on Wednesday that he believes the economy is already heading toward a recession.
“I think we can look back today and say that we will be in a recession by September 2024,” he said.
Focus on the bottom line
At the meeting, the Fed decided to keep its benchmark overnight borrowing rate at the 5.25% to 5.5% range, the same as it has been for the past year.
Markets rose on the news but gave up gains on Thursday after reports that jobless claims rose last week and the manufacturing sector fell into further contraction.
“By postponing a rate cut today, the Federal Open Market Committee is assuming the labor market is strong enough to wait until the fall for inflation to return to 2 percent,” said Nick Bunker, director of North American economic research at Indeed Hiring Lab. “Let’s hope that pays off.”
As always, markets will also be closely watching the average hourly earnings portion of the report for signs of underlying inflation.
The forecast calls for profits to grow 0.3% month-on-month and 3.7% year-on-year. If the latter proves correct, it would be the smallest profit increase since May 2021.
“Even if wage pressures unexpectedly stall or re-accelerate slightly in this report, we believe the progress the Fed has made so far in tackling inflation means the Fed should still have an opportunity to cut rates in September if subsequent data releases (e.g. July CPI) are on track,” said Beichen Lin, investment strategist at Russell Investments.
