Dive Brief:
- Weak payroll growth and a rise in unemployment last month to 4.3% from 4.1% in June do not foreshadow a severe job market slump, a Conference Board economist said as the organization reported that its employment trends index fell for July.
- “The signals of softening that have emerged so far remain well within historic ranges and do not portend broader deterioration,” Mitchell Barnes, Conference Board economist, said in a statement. The employment index is still more favorable than the pre-pandemic trend while “steadily reverting toward 2019 and early 2020 levels.”
- Even with unemployment rising, the labor market in some ways is still tight, the Conference Board said. Thirty-eight percent of small firms report difficulty filling jobs, an improvement from 42% in May but far above the 23% average from July 2009 until January 2020. The job market is “cooling from its torrid, post-pandemic pace, yet the trend of labor hoarding continues despite rising labor costs,” Barnes said.
Dive Insight:
Payrolls expanded only 114,000 in July, below expectations and the lowest monthly increase this year. With signs of wage gains and manufacturing also weakening, investors fearing a recession have pulled back from risk in recent days, triggering stock market volatility and prompting expectations of more aggressive easing by the Federal Reserve than forecast early last week.
“The market panic appears disproportionate,” EY Chief Economist Gregory Daco said in a note to clients. The selloff may “tighten financial conditions, subsequently impacting the private sector and leading to economic retrenchment.”
Despite slowing job gains, the underlying economy remains solid. Gross domestic product will likely grow at a 2.9% annual rate during the current quarter after expanding 2.8% in Q2 and 1.4% in Q1, the Atlanta Fed said Tuesday. On Thursday the Atlanta Fed predicted Q3 growth of 2.5%.
As stock markets stabilized on Tuesday, traders in interest rate futures reduced the probability that the Fed will cut its main interest rate by a half point next month to 71% from 85% on Monday, according to the CME FedWatch Tool.
On July 29 — before the payrolls report on Friday — the market saw just 11% odds of a reduction of that size from the current range of 5.25% to 5.5%.
At the end of a two-day meeting of policymakers on Wednesday, Fed Chair Jerome Powell signaled that the central bank is nearing a rate cut while cautioning against expecting that one new data point will prompt the central bank to shift policy.
Policymakers believe “that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate,” he said during a press conference. “In that, we will be data dependent but not data-point dependent, so it will not be a question of responding specifically to one or two data releases.”
Moreover, the 0.2 percentage point increase in unemployment last month was largely fueled by temporary layoffs and workers who re-entered the labor force, Barnes said.
“The spike may not be as severe as the headline suggests,” he said.
In another sign of solid demand for labor, the share of respondents to a Conference Board survey who said “jobs are hard to get” rose to 16% last month but is still nearly half of the 30.1% average from July 2009 until January 2020.
In calculating its employment trends index, the Conference Board combines eight indicators of demand ranging from initial claims for unemployment insurance and job openings to industrial production and the percentage of firms unable to fill openings.
“Aggregating individual indicators into a composite index filters out ‘noise’ to show underlying trends more clearly,” the Conference Board said.
