The slowdown in U.S. employment in July exceeded expectations, with the unemployment rate reaching its highest level in nearly three years.
The rise in unemployment triggered the so-called Sahm Rule, which has had a 100% accuracy rate since 1970.
On Friday, Eastern Time, the U.S. Bureau of Labor Statistics released data showing that U.S. employment slowed more than expected in July, with the unemployment rate reaching its highest level in nearly three years, indicating that the labor market is deteriorating faster than previously expected, and has already triggered an economic recession indicator.
This employment report has laid the foundation for the Fed's rate cut in September. In fact, traders not only expect a rate cut in September, but have also increased their bets on a significant rate cut by the Fed. The probability of a 50 basis point rate cut in September is expected to rise to 70%.
Specifically, the seasonally adjusted non-agricultural employment in July increased by only 0.114 million people, the smallest increase since April 2024, far below the expected 0.175 million.
The unexpected rise in the unemployment rate to 4.3%, for the fourth consecutive month, may exacerbate concerns about an economic downturn.
It is worth noting that the rise in unemployment triggered the so-called Sahm Rule, which states that when the three-month average unemployment rate rises 0.5 percentage points from the low of the previous 12 months, the economy is in a recession. This indicator has had a 100% accuracy rate since 1970.
In addition, the non-agricultural employment figures for May were revised down from 0.218 million to 0.216 million, while those for June were revised down from 0.206 million to 0.179 million. After the revision, the total number of new jobs in May and June was 0.029 million lower than before the revision.
The closely watched inflation barometer -- average hourly pay rose only 0.2% monthly, below expectations of 0.3%, with annual average hourly pay falling to 3.6%, the smallest year-on-year increase since May 2021, compared with an increase of 3.8% in June.
From an industry perspective, the healthcare industry once again led job growth, creating 550,000 new jobs. Other industries with significant increases include construction (250,000), government departments (170,000), transportation and warehousing (140,000), and leisure and hospitality has consistently been the industry with the most job growth, adding 230,000 jobs.
The report added to the complex signals about the economy, which have caused financial markets to worry about how the Fed will respond. After the data was released, the three major U.S. stock index futures fell sharply, while spot gold surged $15 in the short term.
Although the market was cheered by signs on Wednesday that the Fed may cut interest rates as early as September, Thursday's economic data showed an unexpected increase in claims for unemployment benefits and further weakness in manufacturing, quickly turning the market into panic. This led to the worst sell-off on Wall Street this year and renewed concerns that the Fed may cut interest rates too late.
Fed Chairman Powell said this week that there was no need to focus 100% on inflation because they had made progress, and the Fed was closely watching the labor market and remaining vigilant for signs of a sharp decline, hoping not to cause undue harm to the labor market.
Clark Bellin, chief investment officer of Bellwether Wealth, said:"Despite the significant resilience of the labor market in the context of high rates in the past two years, it is important for the Fed to continue to cut interest rates in September as planned before the labor market further slows down."
Derek Tang, a monetary policy analyst, commented that this environment means the need for accelerated rate cuts, and the Fed is now inclined to avoid an economic downturn, or what they call maintaining expansion. With this employment report, it will become more unbalanced and the risk of rising inflation will be a thing of the past.
Naeem Aslam, chief investment officer of Zaye Capital Markets, said:"It is clear that the Fed has made another policy mistake and should have cut rates at Wednesday's policy meeting."
U.S. President Biden acknowledged in a statement that job growth had slowed but put it in the context of the economy returning to normal. He said today's report showed slower job growth as inflation fell significantly.
Editor / jayden