The July jobs report, set for release by the Bureau of Labor Statistics at 8:30 a.m. ET on Friday, is expected to be a pivotal indicator of the current state of the US labor market. Economists predict that nonfarm payrolls will have increased by 175,000 in July, a deceleration from the 206,000 jobs added in June, while the unemployment rate is projected to remain steady at 4.1%. These figures, compiled by Bloomberg, are crucial metrics that Wall Street and policymakers closely monitor.
In June, the unemployment rate rose unexpectedly to 4.1%, marking a significant shift in labor market dynamics. Here are the key metrics Wall Street will be scrutinizing compared to the previous month:
- Nonfarm payrolls: Expected to rise by 175,000 vs. June’s increase of 206,000
- Unemployment rate: Expected to hold steady at 4.1%
- Average hourly earnings, month over month: Expected to increase by 0.3%, consistent with June’s growth
- Average hourly earnings, year over year: Expected to grow by 3.7%, slightly down from June’s 3.9%
- Average weekly hours worked: Expected to remain unchanged at 34.3 hours
The impact of Hurricane Beryl on the labor market will be a particular focus. Goldman Sachs estimates that the hurricane could reduce July’s overall nonfarm payroll additions by approximately 15,000. This adjustment highlights the sensitivity of labor market data to external shocks.
Federal Reserve Chair Jerome Powell and other economists have indicated that they are no longer overly concerned about a tight job market driving inflation. Instead, the focus has shifted to broader economic implications. Sarah House, a senior economist at Wells Fargo, noted that the momentum in the labor market has eased in the second quarter, reducing fears that employment gains might add upward pressure on inflation.
The critical question for the July jobs report and the remainder of 2024 is whether the slowing job growth indicates a normalization of the labor market or the onset of a more significant economic slowdown. Michael Gapen, a US economist at Bank of America, suggested in a research note that the report would likely show a gradual cooling of the labor market.
Powell expressed similar sentiments during his press conference on Wednesday. He emphasized that the Fed is now more vigilant about both the risk of persistent inflation and the potential for rising unemployment. He indicated that the labor market is undergoing a “gradual normalization.”
However, recent economic data has signaled growing concerns. On Thursday, two reports underscored signs of economic softening. Weekly jobless claims rose more than expected, with 249,000 initial claims filed in the week ending July 27, up from 235,000 the previous week, marking the highest level since August 2023. Additionally, the June Job Openings and Labor Turnover Survey (JOLTS) revealed a slight decrease in job openings, with hiring falling and quits reaching their lowest level since November 2020.
These developments contributed to a market sell-off on Thursday, with the 10-year Treasury yield falling to its lowest level since February. The Dow Jones Industrial Average dropped by around 495 points, or 1.2%, after initially falling by as much as 744 points. The tech-heavy Nasdaq Composite slumped 2.3%, while the S&P 500 experienced broad losses, declining by 1.4%. The small-cap Russell 2000, which had surged in July, fell by 2.3%.
Another concern for investors is the potential triggering of the Sahm Rule if the July jobs report shows the unemployment rate rose to 4.2%. This rule, which signals a recession if the three-month average of the national unemployment rate rises by 0.5% or more from the previous 12-month low, has accurately predicted recessions since the early 1970s. Although some, including Sahm herself, argue that post-pandemic labor market dynamics may render the rule less predictive this time, markets might still react negatively.
RBC Capital Markets head of US rates strategy Blake Gwinn warned that such an event would likely exacerbate negative sentiment, leading markets to quickly price in higher odds of a hard landing for the economy.
As the market braces for the July jobs report, the interplay between labor market data, Federal Reserve policy expectations, and broader economic indicators will be closely monitored. Investors and policymakers alike will seek to discern whether the slowing job growth represents a temporary adjustment or a more profound shift in the economic landscape.