U.S. Jobs Report Reinforces View that Fed Has Misread the Economy and Delayed Easing Too Long

August 2, 2024

Unemployment in the United States rose from 4.1% in June to 4.3% last month, triggering the Sahm Rule that stipulates that if its 3-month moving average (4.1% in this case) happens to exceed the prior year’s lowest point (3.4%) by at least a half percentage point, there is a strong chance that a recession likely has already begun.

This data development was accompanied by other worrisome revelations in today’s release:

Private sector jobs went up only 97k, a 16-month low and down from +136k in June and +216k in May.
The U6 gauge of un- and underemployment jumped 0.4 percentage points to a 3-year high of 7.8%.
Hours worked per week dipped to 34.2.
On-year growth in average hourly earnings has slowed by half a percentage point within two months from 4.1% in May to 3.8% in June and a 38-month low of 3.6% in July. This deceleration this far into business cycle is happening too fast. In conjunction with other signs in the labor market, a danger of recession cannot be dismissed.

Not surprisingly at the opening bell five minutes ago, the DOW and SPX fell over 1%, while the interest rate-sensitive Nasdaq plunged almost 2.5%. At 3.85%, the 10-year Treasury yield is a dozen basis points lower than Thursday’s close and has dived 43 basis points in the 8-plus days since July 24.

While the Fed claims to pay no attention to the political calendar, market participants cannot help but do so. To be sure, the years since Covid arrived have been filled with distortions not seen in the floating exchange rate era. Hurricane Beryl, for instance, may have depressed labor market data last month more than thought. By leaving rates unchanged at this week’s meeting, Fed officials have locked themselves into two things they may now regret. It will be about a month and a half more before a downward cycle can even begin, and almost always the first move is no more than 25 basis points. Unless officials break with tradition in a move that could be construed as panic, it will be about May before any support for economic growth from lowering rates might start to be felt.

All this may mean the Democrats chances to retain the presidency or even a stake in sharing control of federal government policy over the next two years could be lost even before this month’s national DNC convention. One of the Trump campaign’s main advantages has been the spike in inflation during part of Biden’s presidency. Ironically, key parts of the Trump economic plans –e.g., tariffs, mass deportations, politicized monetary policy, and no response to climate change and its upward impact on insurance costs — are likely to spawn a fresh upsurge in inflation.

Markets responded to today’s labor market report in an understandable yet chaotic way. More turbulence may follow.

Tags: thoughts on today’s U.S. labor market data

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on Friday, August 2nd, 2024 at 7:58 am and is filed under Deeper Analysis.
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