The U.S. economy continues to avoid recession despite the recurring bad omens, but the weakening labor market continues and puts pressure on the Federal Reserve to cut rates aggressively. Job creation accelerated somewhat in August after the poor data in July and the unemployment rate fell by one-tenth, from 4.3% to 4.2%. But during the month, 142,000 non-farm jobs were created, according to the Federal Reserve. the long-awaited report from the Bureau of Labor Statistics this Friday. Economists had expected a job creation of 164,000. In addition, the figures for June and July have been revised downwards.
The cooling of the labour market is marking the evolution of the world’s largest economy and will be a key factor in determining the amount of the interest rate cut that the Federal Reserve plans to approve at its meeting on 18 September. Following the publication of the data, the quotes for federal funds futures assign an implicit probability of 59% to a 0.50 point interest rate cut on 18 September and 41% to a smaller cut of 0.25 points from the current range of 5.25%-5.5%. Until today, the majority bet was on a 0.25 point cut, so the unemployment data has changed investors’ expectations. The yields on short-term debt also reflect this with their fall.
The new revised figures indicate that only 89,000 jobs were created in July, 25,000 fewer than initially announced. The June estimate has been lowered even more, by 61,000 jobs to 118,000. This makes the last three months the ones with the lowest job creation since the recovery from the pandemic began. And, although the central bank has managed to avoid a price-wage spiral that would cause inflation to become entrenched, wages grew by 0.4% in the month and by 3.8% annually, somewhat above expectations, which may reduce the Federal Reserve’s room for maneuver.
The data does not dispel doubts about the current state of the US economy. The figure is below expectations and the downward revision shows that the labour market is going through a slump, but job creation is still accelerating compared to July and the unemployment rate is down by one-tenth after four months of growth. The soft landing theory remains tenable, but the data also gives arguments to those who fear that the economy is entering a recession.
US President Joe Biden inherited a 6.4% unemployment rate (January 2021), when the economy was still recovering from the impact of the pandemic. Strong job creation allowed it to be reduced to a low of 3.4% in January and April 2023. Since then, it has been rising to 4.3% in July, which triggered the so-called Sahm rule, designed in 2019 by economist Claudia Sahm to serve as an early indicator that the economy is entering a recession.
The rule indicates the beginning of a crisis by comparing three-month moving averages of the unemployment rate. When the most recent average is more than half a point higher than the lowest average of the previous 12 months, the economy would be entering a recession. In July, that difference was 0.53 points, according to the Federal Reserve Bank of St. Louis. Although the rule has worked for predict ((a posteriori) the seven recessions since 1970, has not yet proven its validity and Sahm herself believes that we may be facing a false positive. The unemployment rate is not growing this time due to job losses, but due to the increase in the working population, partly linked to immigration.
After years of labor shortages, companies are careful not to let go of workers as easily as in the past. In addition to the fact that there are no mass layoffs, those who are laid off quickly find other jobs. This avoids the vicious circle of lost income, reduced consumer spending and further job losses that a recession usually triggers. However, compared to many months when jobs were created in almost all sectors, August saw job losses in industry (-24,000) and retail trade (-11,100).
Rate cuts
Federal Reserve Chairman Jerome Powell made clear at the Jackson Hole, Wyoming, economic symposium in late August that the central bank’s main concern has now shifted from inflation to employment. Powell has been trying for more than two years to achieve a soft landing for the US economy, that is, to restore price stability without triggering a recession. There was a time when he believed it would not be possible to control inflation without causing some pain to families and businesses, he said, but the economy has shown an unexpected resistance to the most aggressive interest rate increases since the 1980s.
The Federal Open Market Committee (FOMC) of the Federal Reserve meets on September 17 and 18 to approve the first interest rate cut in four and a half years, since it reduced them to a level close to zero in March 2020 due to the pandemic. Between 2022 and 2023, it brought them to 5.25%-5.5%, the highest level since January 2001. In July of last year, it stopped at that rate, which it has maintained for more than a year. Now, “the time has come,” in Powell’s words, to begin a cycle of cuts. Its pace and amount will depend on the evolution of prices and the labor market. After Friday’s data, the probability of the cut being more aggressive, of 0.5 points, to ward off the ghost of the feared recession has increased.
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