(Bloomberg) -- US hiring slowed markedly in July and the unemployment rate rose to an almost three-year high, raising recession concerns and putting the Federal Reserve solidly on a path to cutting interest rates in September.
Nonfarm payrolls rose by 114,000 — one of the weakest prints since the pandemic — and job growth was revised lower in the prior two months. The unemployment rate unexpectedly climbed for a fourth month to 4.3%, triggering a closely watched recession indicator and hammering stocks.
Friday’s figures cap off a week of disappointing data that heighten concerns of a more abrupt downshift in the economy, and challenge Fed Chair Jerome Powell’s characterization of the slowdown in the job market as “gradual.” However, some aspects of the report may have been distorted by Hurricane Beryl — which hit Texas in the week the survey data were collected — and may rebound in August.
The S&P 500 sunk to a two-month low and Treasury yields slumped as traders increasingly bet that the Fed would pursue a more aggressive rate cut in September. Several economists — many of whom already thought the Fed should have lowered rates at its meeting this week — again criticized the central bank for not moving.
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“The Fed stepped on a nail. Thankfully, they have not stepped on a bed of nails,” Neil Dutta, head of US economics at Renaissance Macro, said in a note. “With the momentum skewed to the downside, it’s much better to ease when you can than to ease when you must,” adding that at least two 50-basis-point cuts is a “reasonable baseline” for this year.
Economists at JPMorgan Chase & Co. and Citigroup Inc. each said in notes to clients they now see half-point cuts in September and November — which would be just days after the presidential election — followed by a quarter-point reduction in December.
What Bloomberg Economics Says...
“Our takeaway is that the labor market’s capacity to absorb new immigrants appears to be diminishing, and it may take longer to absorb them. Our baseline forecast is for the unemployment rate to climb from 4.3% in July to 4.5% by year-end — and to continue rising to 5.0% next year.”
— Chris G. Collins and Anna Wong. To read the full note, click here
The rise in the unemployment rate reflected more people losing and leaving their jobs, rather than new workers entering the labor force. However, people who had previously worked did come back, which helped drive up participation.
The rise in the jobless rate triggered a famous recession indicator known as the “Sahm rule” — which has a perfect track record over the past half-century. The mastermind behind the gauge, former Fed economist Claudia Sahm, said on Bloomberg Radio after the report that while the US isn’t in a recession, “we’re not headed in a good direction.”
While the BLS said Hurricane Beryl had “no discernible effect” on the data, several parts of the report suggested it played a role. The number of people who said they didn’t work because of bad weather surged to more than 14 times its average for July. Another 1 million people who usually work full-time could only find part-time work due to the weather, also far above what’s typical for the month.
That likely affected hours worked and potentially wage growth, both of which eased in July, said Omair Sharif, founder of Inflation Insights LLC. Data from other sources earlier in the week also pointed to slower pay gains in recent months.
The slowdown in payrolls reflected cuts in the information industry and auto manufacturing. Temporary-help positions also declined, which is often looked at as a precursor to a downturn. Meantime, healthcare continued to lead job growth.
The employment diffusion index, which measures the breadth of job growth, declined to the weakest since the immediate aftermath of the pandemic.
The report could focus more attention on the weakening job market for voters whose view of the US economy has been driven by inflation and high prices, in a presidential race that was reset last month when President Joe Biden withdrew and endorsed Vice President Kamala Harris.
Biden acknowledged in a statement that employment “is growing more gradually” and “there’s more to do” but said that inflation has declined and “we’re making progress growing the economy.”
--With assistance from Chris Middleton, Matthew Boesler, Cécile Daurat, Michael Mackenzie, Steve Matthews and Mark Niquette.
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