Weaker than expected nonfarm payroll gains – up by 114,000 (expectations were about 180,000).
The U-3 unemployment rate up to 4.3 percent – the highest since October 2021.
Average hourly earnings up by 0.2 percent – bringing the 12-month trend rate down to 3.6 percent.
Household survey employment up by only 67,000 – the trend is very weak.
The pace of job growth is still OK, with the 114,000 increase about what we would expect if the economy were growing at around trend. In a Goldilocks economy, this is about what we would want.
But the direction of movement in all of the job numbers is negative – job growth slowing, unemployment rising, earnings growth slowing.
So, is the economy finally downshifting to the slower pace of trend growth – or are we transitioning from above-trend growth to recession? The 4.3 percent level of the unemployment rate triggers the Sahm Rule – with the 3-month average of the U-3 rate more than half a percentage point above the 3-month low over the past year (but only barely). But the labor force is still growing, so perhaps the breach in the Sahm Rule is a false signal (as, at least so far, the inverted yield curve and declining Leading Economic Indicators have proven to be).
Financial markets expect the Fed to ease at the next (September) FOMC meeting – with expectations now for a 50 bps cut in the federal funds rate. We will get another employment report before that meeting, as well as the usual other monthly economic data. If that data continue to suggest that the economy is slowing, then a 50 bps cut is in play in September. But if the economic data suggest only a little more slowing, and the inflation data don’t drop by much, then a 25 bps cut could still occur. And the Fed would have to be concerned about the signal that such a large move would give to financial markets (unless an incipient recession was obvious at that point). So, unless the data weaken further, a 25 bps cut is still more likely in September. But almost certainly another 25 bps cut at either the November or December FOMC meeting – and perhaps both.
Perhaps the inversion of the yield curve is still an accurate forecast of recession, but the huge magnitude of fiscal expansion offset tighter monetary policy for longer than usual. A bumpy ride ahead.
David W. Berson, Ph.D.
Chief US Economist
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