Unemployment on the Rise, Economic Consequences Await
In an unexpected turn of events, the US hiring rate significantly decelerated last month, with employers adding only 114,000 jobs as per the Labor Department’s latest report. This is a sharp decline from the 179,000 jobs created in June. Experts had anticipated a figure closer to 175,000 for July. The unemployment rate has surged to 4.3%.
Despite the Federal Reserve’s endeavors to control inflation with high interest rates, the economy has demonstrated resilience. However, the higher borrowing costs seem to be taking a toll. The Fed raised its benchmark rate 11 times in 2022 and 2023, driving it to a 23-year high.
Impact on Job Creation
From the start of the year to June, the economy has produced an average of 222,000 new jobs per month. This is a decline from an average of 251,000 last year, 377,000 in 2022, and a record 604,000 in 2021 when the economy rebounded from COVID-19 lockdowns.
With the presidential election coming up in November, the state of the economy is a significant concern for voters. Despite strong job gains over the past three years, many are frustrated with high prices. Inflation reached a four-decade high two years ago. Although the price increases have somewhat cooled, consumers are still paying 19% more for goods and services than before inflation first surged in spring 2021.
The Sahm Rule
The recent job report reveals some concerning patterns. For instance, Labor Department revisions reduced April and May payrolls by a combined 111,000. This means that monthly job growth averaged just 177,000 from April through June, marking the lowest three-month average since January 2021.
Additionally, the unemployment rate has been increasing for the past three months. In July, it surged to 4.3%—crossing a threshold that has historically indicated an economy in recession. This is known as the Sahm Rule, named after former Fed economist Claudia Sahm.
According to Sahm, a recession is almost always underway if the unemployment rate (based on a three-month moving average) rises by half a percentage point from its low of the past year. This rule has been triggered in every U.S. recession since 1970. However, Sahm, now the chief economist at New Century Advisors, believes that a recession is not imminent, even if the unemployment rate crosses the Sahm Rule threshold.
Unsettling Trends and Future Projections
Experts believe that the rising unemployment rates reflect an influx of new workers into the American labor force who need time to find work, rather than an alarming increase in job losses.
However, the jobs numbers have been unsettled by an unexpected surge in immigration over the past couple of years. These new arrivals have eased labor shortages across the economy, but not all of them have found jobs right away, leading to an increased jobless rate.
Despite these observations, Sahm remains concerned about the hiring slowdown, emphasizing that a deteriorating job market can have a domino effect.
Looking ahead, it is widely expected that the Fed will make the first cut at their next meeting in September. This decision will be influenced by the data from July’s job report, which could provide some encouraging news. According to FactSet, forecasters expect last month’s average hourly wages to come in 3.7% above July 2023 levels. This would be the smallest gain since May 2021 and would mark progress toward the 3.5% that many economists see as consistent with the Fed’s inflation goal.
