The U.S. labor market is expected to show signs of cooling in July, due to the gradual economic slowdown and the impact of Hurricane Beryl on hiring rates.
The Labor Department’s July nonfarm payrolls report, due Friday at 8:30 a.m. ET, is expected to reflect this slight decline. However, the expected decline is in line with the Federal Reserve’s strategy for a controlled economic slowdown.
“If the Fed was aiming for a soft landing, it looks like it’s done it,” said Mike Reynolds, vice president of investment strategy at Glenmede. “We’re seeing some weakness in the labor market, but nothing that suggests a major recession.”
The Bureau of Labor Statistics projects payrolls to rise by 185,000 in July, down from 206,000 in June, with the unemployment rate projected at 4.1%, according to the Dow Jones Consensus. Historically, jobs reports have often topped those estimates.
However, some economists are more cautious. Goldman Sachs predicts that Hurricane Beryl, which has hit Texas hard, especially Houston, could reduce the number of jobs by 15,000, bringing the total increase in payrolls closer to 165,000. Citigroup predicts an even lower increase of 150,000, with a slight increase in the unemployment rate to 4.2%.
A rising unemployment rate could raise concerns about the Sahm Rule, which signals a recession if the three-month unemployment rate averages half a percentage point higher than a 12-month low. Last July, the rate was 3.5%.
Optimism at the Fed
Job growth averaged 203,000 per month in the first half of 2024, while the unemployment rate increased as more people entered the labor force. The number of people who were unemployed but actively seeking work or temporarily laid off reached the highest level since October 2021.
Fed Chair Jerome Powell noted Wednesday that the previous imbalance between labor supply and demand has largely corrected. Job vacancies now outnumber available workers by 1.2 to 1, down from 2 to 1 a few years ago when inflation was higher.
If these trends continue and other inflation indicators improve, Powell hinted at a possible interest rate cut in September.
“Our confidence is growing because we are getting good data,” he told a news conference. “The easing of labor market conditions reassures us that the economy is not overheating.”
Markets will be watching Friday’s report closely to validate Powell’s optimism and ensure the Fed isn’t delaying rate cuts too long.
Many on Wall Street believe the Fed should start easing, as most indicators suggest the inflation rate is approaching the central bank’s 2% target. DoubleLine CEO Jeffrey Gundlach said Wednesday that he believes the economy is already on the brink of recession.
“When we look back today… I think we will say we were in a recession by September 2024,” Gundlach predicted.
Focus on earnings
At its recent meeting, the Fed kept its benchmark overnight interest rate between 5.25% and 5.5%, in line with last year.
Markets initially rallied on the news, but took a hit on Thursday following reports of rising jobless claims and a decline in manufacturing activity.
“By delaying a rate cut, the Federal Open Market Committee is betting that the labor market is resilient enough to wait until the fall to confirm that inflation is returning to 2%,” said Nick Bunker, director of North American Economic Research at Indeed Hiring Lab. “Hopefully, that bet pays off.”
As always, the average hourly earnings portion of the report will be closely monitored for signs of underlying inflation.
Earnings are expected to have risen 0.3% for the month and 3.7% year-over-year. If correct, this would mark the lowest earnings growth since May 2021.
“Even if wage pressures remain flat or rise slightly in this report, we believe the Fed’s progress on inflation supports the possibility of a rate cut in September, provided subsequent data, such as July’s CPI, are in line,” said BeiChen Lin, investment strategist at Russell Investments.
