U.S. Hiring Slowdown Impacts Stocks, Spurs Speculation on Bigger Rate Cut

The American job market is still growing, but not at the rapid pace that characterized recent years. This shift sent the stock markets into a turmoil on Friday, with the Dow Jones Industrial Average plummeting by more than 600 points.

Job growth in July slowed considerably, and the unemployment rate climbed to its highest level since 2021, according to a report from the Labor Department. This data adds to the growing body of evidence suggesting that the labor market, whose strength had already been waning, might be heading towards significant weakening.

The government reported that hiring slowed to 114,000 jobs last month, falling short of economists’ expectations. Concurrently, the unemployment rate rose to 4.3%, the highest it has been in nearly three years, when the economy was still in the early stages of recovering from the COVID-19 pandemic.

Following the release of this data, stocks tumbled sharply, reflecting investors’ renewed concerns about a potential economic slowdown. A broad range of sectors, from banking stocks to small companies, suffered substantial losses. Treasury yields mostly fell below 4%, and the CBOE Volatility Index, known as Wall Street’s “fear gauge,” closed at its highest level of the year.

The tech-heavy Nasdaq Composite entered correction territory, defined as a decline of at least 10% from its recent high. This was exacerbated by disappointing earnings from major technology companies, prompting some investors to question whether the excitement around artificial intelligence, which has driven tech stocks this year, might have gone too far.

The latest jobs report is likely to fuel further debate about whether the Federal Reserve is lagging in its efforts to manage the economy. On Wednesday, Fed policymakers decided to keep interest rates steady but strongly suggested potential cuts in September.

Some investors are beginning to question whether the Fed has already delayed interest rate reductions for too long. While a rate cut in September now seems almost certain, many investors are hoping for a more substantial reduction of half a percentage point rather than the quarter-point cut that was previously anticipated. On Friday, interest-rate futures shifted from implying a quarter-point cut in September to a half-point cut.

During the Fed’s news conference on Wednesday, Chair Jerome Powell stated that a larger half-point cut wasn’t “something we’re thinking about right now.” However, he added, after appearing to conclude his answer, that officials hadn’t made “any decisions at all.”

While it was expected that the labor market would cool down from its post-pandemic hiring surge, the pressing question now is whether it will continue to weaken into a recession.

Friday’s jobs report was not the only indicator of a slowing economy released this week. On Thursday, the Institute for Supply Management reported that its measure of manufacturing employment deteriorated in July, contributing to a selloff in stocks. Additionally, after the market closed on Thursday, Intel reported disappointing quarterly sales and announced plans to lay off 15,000 employees, leading to a 26% drop in its shares on Friday.

The Labor Department also reported that average hourly earnings rose by 3.6% in July compared to a year earlier. While this is above the recent pace of inflation, it marks the smallest gain since May 2021. Moreover, the job counts for May and June were revised down by a combined 29,000.

The increase in the unemployment rate was driven by more people looking for jobs rather than job losses. The labor-force participation rate, which measures the share of working-age people who are employed or actively seeking work, rose to 62.7% from 62.6% in June. Without this increase in participation, the unemployment rate would have remained at 4.1%.

Job gains in July were primarily concentrated in the healthcare sector, which added 55,000 jobs, followed by construction with 25,000 jobs, and leisure and hospitality with 23,000 jobs. Conversely, the information sector lost 20,000 jobs.

The slowdown in job creation last month may have been influenced by Hurricane Beryl, which made landfall in Texas on July 8, coinciding with the Labor Department’s employment survey week. Although the Labor Department stated there was “no discernible effect on the national employment and unemployment data for July,” many economists questioned this. Jefferies economist Thomas Simons noted that over a million customers in the Houston area were without power during the survey week, and there was a notable increase in initial claims for unemployment insurance in Texas. The Labor Department reported that 461,000 people with jobs were unable to work due to weather in July, compared to an average of 37,000 over the previous 10 Julys. The August jobs figures could see a rebound as these storm effects reverse.

Other labor market indicators are also flashing warning signs. The Sahm rule, an indicator developed by economist Claudia Sahm, suggests that if the average unemployment rate over three months rises by half a percentage point or more above the lowest three-month average over the previous year, the economy is in a recession. Over the past three months, the unemployment rate has averaged 4.13%—0.53 percentage points above the three-month average low of 3.6% over the past year.

Fed Chair Jerome Powell characterized the Sahm rule as a “statistical regularity” rather than a definitive economic rule. Sahm herself does not believe the economy is on the immediate cusp of a recession. She argues that changes in the labor supply since the pandemic, including a recent increase in immigration, have led the Sahm rule to overstate the job market’s weakness. However, she remains concerned about the direction the economy is heading: while the unemployment rate is historically low, it has been trending higher, and the number of jobs added each month, though still strong, has been declining.

The Labor Department reported on Tuesday that the hires rate—the number of hires as a share of total jobs—slipped to 3.4% in June, its lowest level since April 2020. This is down from an average of 3.9% in 2019. Despite the low hires rate, the economy has continued to add jobs due to muted layoff activity, with the June layoff rate matching its lowest level on record.

As the labor market shows signs of cooling, investors and policymakers alike are closely watching for indications of whether this trend will stabilize or lead to further economic downturns. The coming months will be critical in determining the trajectory of the economy and the appropriate policy responses.