“Recent economic data has indicated a very moderate softening in the pace of economic activity and the strength of the labor market. The July employment report is a significant departure from that trend. This was a categorically weak report. Nonfarm payroll employment rose by only 114,000 jobs, significantly below the consensus of economic forecasts, and previous month job numbers were revised down somewhat. The increase in the unemployment rate to 4.3% from 4.1% in June will attract a significant amount of attention, though changes in the unemployment rate can be noisy, particularly given the reported increase in the labor force participation rate. Average weekly hours also decreased from 34.3 in June to 34.2 in July, an important leading indicator for the health of the labor market, as employers tend to reduce hours before laying off employees. All of the signs in this report point to a material softening in the labor market.
Given the Federal Reserve’s shift this week to a greater focus on the employment side of its mandate, markets are rightly reacting by significantly increasing the expected number of rate cuts in the near future. But fears of a sudden stop of the U.S. economy and an associated violent reaction from the Fed are overblown. Stepping back, this employment report is one that indicates modest weakness, not an impeding recession. Additionally, employment reports tend to be quite noisy and are subject to significant revisions. The private sector is still creating jobs, albeit at a slower pace. The dominant narrative in markets will become whether the Fed is 'behind the curve,' but only the economic data in coming months will reveal whether the U.S. economy has downshifted to a modestly slower growth paradigm, or whether a more severe downturn is beginning.”
- Dan Katz, Manhattan Institute Adjunct Fellow.
Katz previously served as a senior advisor at the United States Department of the Treasury. He has published widely on economic policy, international affairs, and financial markets in City Journal, The Wall Street Journal, Bloomberg, the Financial Times, Barron’s, National Review, The Hill, and the Center for Strategic and International Studies. For a list of his previous writing at the Manhattan Institute, click here.
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