A smaller than expected increase in nonfarm payrolls for July (only 73,000) and massive downward reductions in payrolls – lower by 238,000 for May and June. This is a huge revision to payrolls and when coupled with the modestly below market expectations for July, it suggests that the job market is substantially weaker than previously thought. Private sector employment increased a tad more than the total, up by 83,000 for July.
The U-3 unemployment rate edged higher to a still-low 4.2 percent – helped by both a small decline in the civilian labor force and a bigger rise in the number of unemployed workers.
These are not recessionary figures, but they are modest at best and show a deceleration in the job market. The advanced estimate for second quarter real GDP growth showed an acceleration to an annualized pace of 3.0 percent, but the “core” measure (real final sales to private domestic purchasers) slowed to an annualized pace of 1.2 percent – a bit below trend. The modest gain in July payrolls and the downward revisions to prior months support this.
Fed Chair Powell noted earlier this week that the Fed would continue to look at the data on inflation and the job market to determine future policy moves. The PCE inflation figures for July were a bit worse than expected while the job figures were substantially worse. Does this suggest that the odds of near-term Fed easing have increased? The CME Group’s FedWatch tool shows there is a 67 percent chance that the Fed will ease by 25 basis points at the September FOMC meeting – almost a complete switch from yesterday when the odds were about 67 percent for no change. Moreover, there is now a nearly 25 percent chance that there will be three Fed cuts by year end.
If the inflation figures trend higher in the next couple of months (probably mostly from tariffs), then the Fed will face a difficult decision if the job market does not pick up. Should it stay the course (or even tighten policy) with higher prices, or should it respond to the weaker job market and ease policy. The answer is still not clear, but if the job market weakens further before the September FOMC meeting, Fed easing odds will rise further.
David W. Berson, Ph.D., CBE
Chief Economist
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