CNN
—
What a jarring way to start the month of August.
Last month’s job growth was far, far softer than expected, and the unemployment rate shot to its highest level since October 2021, according to new data released Friday by the Bureau of Labor Statistics.
July’s surprisingly low estimated employment gains of 114,000 and the surprisingly high 4.3% jobless rate painted a picture of a significantly weaker job market and raised some fears of a pending recession.
Last month’s payroll gains were significantly lower than the 175,000 that economists were expecting, according to FactSet. The unemployment rate was forecast to remain at 4.1%.
However, while Friday’s report showed that the cracks in the labor market may be widening, there also were indications it still remains on solid-enough footing … for now.
It’s a labor market that appears to be on the brink.
Taken on its own, this is a “treading water” jobs report, Ernie Tedeschi, the former chief economist at the White House Council of Economic Advisors who now serves as Yale Budget Lab’s director of economics, told CNN.
“We’re in an economy where a 100,000-per-month jobs report could mean a good thing, or it could mean a bad thing,” he said. “We could be talking about an economy that is at full employment that is just settling into a long-run equilibrium, and that is a good thing; that’s the goal.”
“On the other hand, we could be talking about a labor market that is deteriorating, one where policymakers should be acting more concretely to intervene to help,” he added.
Friday’s report also is raising questions of the Federal Reserve which, as inflation has slowed, has become more attuned to any weakening in the labor market, but opted to hold interest rates steady on Wednesday. These latest numbers now cast doubt as to whether the job market has enough gas in the tank left to stay on cruise control until and after the first cut is made (as monetary policy acts with a lag).
“Yellow flags had started to pop up in the labor market over the past few months, but now the flags are turning red,” Nick Bunker, economic research director for North America at the Indeed Hiring Lab, wrote in a post Friday. “The rise in the unemployment rate cannot be ignored as job gains have weakened and become less common. Something needs to change for the labor market to remain relatively healthy, but it’s unclear if that change can come in time.”
The first interest rate cut is all but certain to occur in September.
“Oh dear, has the Fed made a policy mistake?” Seema Shah, chief global strategist for Principal Asset Management, wrote Friday in commentary. “The labor market’s slowdown is now materializing with more clarity. Job gains have dropped below the 150,000 threshold that would be considered consistent with a solid economy.”
Stocks slid Friday as the jobs report added to fears that the US economy is weakening. The Dow fell by more than 900 points, or 2%, in mid-morning trading. CNN’s Fear & Greed Index, which measures seven barometers of market sentiment, fell to a “fear” reading of 26.
Still, Tedeschi and other economists cautioned to not rely too heavily on one month’s worth of data: During the past three months, job gains are averaging 170,000, which is higher than the average monthly job growth seen in 2019, BLS data shows.
Also, it’s not the lowest monthly gain notched this year: That happened in April, when downward revisions resulted in 108,000 net jobs created. But, July’s 114,000 also is the second-lowest monthly gain since December 2020.
“We’re in OK territory,” Elizabeth Crofoot, senior economist at labor analytics firm Lightcast, said in an interview. “It’s when you get below 100,000 when I would start to get worried.”
President Joe Biden on Friday sought to tamp down some concerns after Friday’s disappointing job numbers, writing in a statement that the report “shows employment is growing more gradually at a time when inflation has declined significantly.”
The health care and social assistance industry continued to lead the job growth last month — accounting for more than half of the monthly gains by adding 64,000 jobs. Construction (+25,000), leisure and hospitality (+23,000), and government (+17,000), saw the next-highest gains; however, job creation across other industries was languid.
In fact, more industries than not lost jobs last month, BLS data shows.
While the US labor market remains in a historic period of expansion — July marks the 43rd consecutive month of job growth, the fifth-longest on record — much of the gains seen in the past two years have not been broad-based, heightening concerns among labor economists that the strength of a few is masking weakness among the many.
Wage growth slowed more than expected: Average hourly earnings rose 0.2% for the month and 3.6% for the year. Fed Chair Jerome Powell said Wednesday that wage growth and the labor market were not inflationary.
And then there’s the unemployment rate: Up until June, when it rose to 4.1%, the nation’s jobless rate was on a 30-month streak of being at or below 4%.
Economists expected it to hold steady, but instead it marched higher for the fourth-consecutive month and landed at 4.3%. Put in historical context, 4.3% ain’t too shabby, but the rate at which it’s been escalating as of late makes it more uncomfortable, Crofoot said.
The increase triggers the “Sahm rule,” an indicator that a recession is imminent or underway if the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its prior 12-month low.
However, plenty of rules have been broken in this post-Covid economy, and even Claudia Sahm, the economist who created the rule, cautioned this week that a triggering may not equal a recession.
Crofoot held a similar cautionary stance on Friday: “I’m very hesitant to use the ‘R’ word, because I don’t think we’re there; but this is something to keep our eye on.”
The recession bells aren’t ringing for Crofoot, Tedeschi and other economists because the economy is still growing (a robust 2.8%, in fact, during the second quarter); consumers are still spending; labor force participation remains high; and, most importantly, layoffs aren’t mounting.
The sharp increase in the July unemployment rate can be attributed to what could be viewed as more of a positive reason: “An additional 420,000 individuals [entered] the workforce looking to capture rising wages,” Joe Brusuelas, chief economist with RSM US, wrote in a note to clients on Friday.
