People line up to wait for the opening of the JobNewsUSA.com South Florida Job Fair at Amerant Bank Arena on June 26, 2024, in Sunrise, Florida.
Joe Rydell | Getty Images
The U.S. labor market may have slowed a bit in July, as a gradual slowdown in the economy and Hurricane Beryl are expected to take some of the hiring momentum away.
However, even if the U.S. Labor Department's July nonfarm payrolls report, due out Friday at 8:30 a.m. ET, points to a weaker jobs picture, the decline is expected to be only gradual and in line with the kind of soft landing the Fed is looking to engineer.
“If the Fed was going to manufacture a soft landing, this is probably what it would have looked like,” said Mike Reynolds, vice president of investment strategy at Glenmede. “We are seeing a modest marginal weakness in the labor market that is unlikely to spiral out of control and become a negative feedback loop.”
In fact, the report from the department’s Bureau of Labor Statistics is expected to show payrolls increased by 185,000 jobs during the month, down from 206,000 in June, with the unemployment rate holding steady at 4.1%, according to Dow Jones Consensus Estimates. Jobs reports have routinely topped consensus over the past year and a half.
But some economists say the report may be pessimistic. Goldman Sachs expects Hurricane Beryl, which swept through much of Texas, especially Houston, to cut 15,000 jobs. The firm thinks the total job gains will be about 165,000. Citigroup expects a smaller number — 150,000 jobs on the payrolls and a slight increase in the unemployment rate to 4.2 percent.
If the unemployment rate continues to rise, it could raise concerns that the so-called Sahm rule is at risk. The rule has long held that when the average unemployment rate over a three-month period rises by half a percentage point from its 12-month low, the economy is in recession. A year ago, unemployment was at 3.5% before it started rising.
Optimism at the Fed
Job gains averaged 203,000 per month for the first half of 2024, while the unemployment rate rose as more workers joined the labor force, and the level of those considered unemployed but looking for work or temporarily laid off reached its highest level since October 2021.
Federal Reserve Chairman Jerome Powell noted Wednesday that the previous gap between supply and demand in the labor market is now roughly in balance, with open jobs now outnumbering available workers by just 1.2 to 1, down from 2 to 1 a few years ago as inflation rose.
If factors continue to balance out and other inflation indicators show progress, Powell has strongly hinted that a rate cut could come in September.
“Our confidence is increasing because we're getting good data. Frankly, the slowdown in labor market conditions gives you more confidence that the economy is not overheating,” he said at a news conference following the Fed's monetary policy meeting.
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 overly confident and waiting too long to start cutting interest rates.
There has been a growing chorus on Wall Street calling for the Fed to start easing monetary policy now that most indicators show inflation is within striking distance of the central bank’s 2% target. DoubleLine CEO Jeffrey Gundlach, for example, told CNBC on Wednesday that he believes the economy is already teetering on the edge of recession.
“When we look back today, I think we would say we were in recession in September 2024,” he said.
Focus on profits
The US Federal Reserve voted at its meeting to keep the benchmark overnight borrowing rate in the range of 5.25% to 5.5%, the same level it has been at for the past year.
Markets rose on the news, but gave up those gains on Thursday after news that unemployment claims rose last week and the manufacturing sector fell further into contraction.
“By delaying today’s rate cut, the FOMC is betting that the labor market is strong enough to wait until the fall to see if inflation returns to 2%,” said Nick Bunker, director of economic research at Indeed Hiring Lab North America. “Let’s hope this move pays off.”
As always, markets will also be focusing on the average hourly earnings portion of the report for signs of underlying inflation.
Earnings are expected to rise 0.3% on the month and 3.7% from a year ago. If true, that would be the smallest increase in earnings since May 2021.
“Even if wage pressures unexpectedly remain ‘stuck’ or accelerate slightly in this report, we believe the Fed’s progress on inflation so far means there should still be room for the Fed to cut rates in September as long as subsequent data releases (e.g. July CPI) cooperate,” said Peichen Lin, investment strategist at Russell Investments.
