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The U.S. labor market is anticipated to show signs of cooling in July, influenced by a gradual economic slowdown and the impact of Hurricane Beryl on hiring rates.
The Labor Department’s July nonfarm payrolls report, scheduled for release on Friday at 8:30 a.m. ET, is expected to reflect this slight downturn. However, the anticipated decline aligns with the Federal Reserve’s strategy for a controlled economic deceleration.
“If the Fed aimed for a soft landing, it seems they’ve managed it,” said Mike Reynolds, VP of Investment Strategy at Glenmede. “We’re witnessing slight weaknesses in the labor market, but nothing that suggests a severe downturn.”
Projections from the Bureau of Labor Statistics indicate a payroll increase of 185,000 for July, down from June’s 206,000, with the unemployment rate predicted to be 4.1%, per the Dow Jones consensus. Historically, jobs reports have often exceeded these estimates.
Nevertheless, some economists are more cautious. Goldman Sachs predicts that Hurricane Beryl, which has heavily affected Texas, particularly Houston, could reduce job numbers by 15,000, bringing the total payroll increase closer to 165,000. Citigroup forecasts an even lower increase of 150,000, with a slight rise in the unemployment rate to 4.2%.
A rising unemployment rate could trigger concerns about the Sahm Rule, which indicates a recession if the unemployment rate over three months averages half a percentage point higher than its 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 individuals entered the workforce. The number of unemployed but actively seeking work or temporarily laid off reached its highest level since October 2021.
Fed Chair Jerome Powell remarked on Wednesday that the prior 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.
Should these trends continue and other inflation indicators improve, Powell hinted at a potential interest rate cut in September.
“Our confidence is growing because we’re getting good data,” he stated during a press conference. “The easing of labor market conditions reassures us that the economy isn’t overheating.”
Markets will scrutinize Friday’s report to validate Powell’s optimism and to ensure the Fed is not delaying rate cuts too long.
Many on Wall Street believe the Fed should begin easing, given that most indicators suggest the inflation rate is nearing the central bank’s 2% target. DoubleLine CEO Jeffrey Gundlach expressed on Wednesday that he believes the economy is already verging on recession.
“When we look back today… I think we’ll say we were in a recession by September 2024,” Gundlach predicted.
Focus on Earnings
In its recent meeting, the Fed kept its benchmark overnight interest rate between 5.25% and 5.5%, consistent with the past year.
Markets initially rallied on the news but pulled back on Thursday following reports of rising jobless claims and declining manufacturing activity.
“By delaying a rate cut, the Federal Open Market Committee is betting that the labor market is resilient enough to wait until fall to confirm inflation is returning to 2%,” said Nick Bunker, Director of North American Economic Research at Indeed Hiring Lab. “Let’s hope this bet pays off.”
As always, the average hourly earnings segment of the report will be closely watched for signs of underlying inflation.
Earnings are expected to have increased by 0.3% for the month and 3.7% year-over-year. If accurate, this would mark the lowest earnings growth since May 2021.
“Even if wage pressures remain steady 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, like July’s CPI, aligns,” said BeiChen Lin, Investment Strategist at Russell Investments.
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