It’s a hot summer with a labor market to match. The question is no longer “is this a recession” but rather “Is the job market too hot for the comfort of the Fed?”
Send the news: The jobs slowdown that economists had expected is not coming to fruition. On the contrary, the economy added 528,000 jobs in July — the strongest print since February, and double what economists had expected.
- The unemployment rate fell to 3.5%, its pre-pandemic level and the lowest in nearly half a century.
Why it matters: There are a lot of headlines about buzzy companies laying off employees. But the numbers show that most companies have an insatiable demand for workers. You just don’t see that during a recession.
- That’s excellent news for job seekers and gives the Biden administration some much-needed good news to trumpet.
- “Economies in recession do not produce 528,000 jobs in any given month and have an unemployment rate of 3.5%,” RSM US chief economist Joe Brusuelas said in a note. “Claims that the economy has entered recession or is in recession fall flat and should be politely brushed aside.”
Yes but: The Fed’s rate hikes are designed to slow the economy in hopes of curbing inflation. The new numbers suggest that, at least with regard to the labor market, it’s not working so far.
- As Harvard economist Jason Furman I putt, the numbers are “uncomfortably hot”.
Between the lines: Key figures aside, Fed officials will likely see reasons to worry that inflationary pressures will remain high for the foreseeable future.
- Another worrying sign is on the labor supply front, which is heading in the wrong direction. The number of adults not in the labor force increased by 239,000 and the employment rate decreased. At 62.1%, it remains 1.3 percentage points below pre-pandemic levels.
- Over the past year, wages have increased by 5.2%. However, wage growth accelerated in July to an even faster rate of 5.8% year-on-year.
There is a lot of data between now and the Fed’s mid-September meeting. But what we’ve seen so far – robust job creation, a shrinking workforce and rising wages – would imply that a 0.75 percentage point rate hike is still on the table.
In the meantime, the markets are already seeing tighter money on the way, swinging in a way that anticipated the Fed’s likely reaction to the new numbers, essentially doing Chairman Jerome Powell’s job for him.
- Two-year government bond yields peaked around 0.2 percentage point to 3.2% this morning, a huge step. Longer-term interest rates also shot up and the 10-year yield rose by 0.15 percentage point to 2.83%.
- Those higher rates will seep through to rates on mortgages, auto loans and other forms of credit — meaning the good jobs numbers will have an immediate effect on the economy.
It comes down to: It’s great news that jobs abound, and almost any American who wants to work can find them. But that means there may be more pain coming in the form of higher rates.