What a difference a jobs report makes. At the start of the summer, people were nervous that the economy was too hot. But now – especially in response to weaker than expected employment data published on August 2, 2024 – Stock prices fallSome analysts even fear that a recession might be imminent.
As a Professor of Business AdministrationI urge everyone, from investors to consumers to policymakers, to calm down, take ten deep breaths and chill out. Taken together, the economic data paint a greater, if more complex, picture.
Why investors are freaking out
If that The latest US labor market report has been publishedthe market was not completely satisfied.”Dow Jones plunges nearly 1,000 points after report shows sharp decline in US labor market figures” read one headline. When the Dow closed on the day the report was released, the index had lost about 2% of its value in comparison with the day before today’s close.
The sell-off has intensified. Global stock markets falling even further after investors had your complete weekend to process the labor market data. The DowThe S&P500 And Nasdaq-Composite all recorded losses on August 5. The Japanese Nikkei closed 12% lowera big decline.
The report that sparked all this turmoil found that the U.S. economy added only 114,000 latest jobs in July 2024 – fewer than the expected 175,000.
These numbers were widely viewed as disappointing. As CNN put it, they raised concerns:The labor market is slowing down too quickly and will trigger a recession.” Many news reports identified that the report triggered an indicator often called Sahm rulewhich has reliably signaled a recession previously.
In response to this perceived threat of recession, many individuals have criticized the Federal Reserve for not cutting rates of interest sooner. US Senator Elizabeth Warren, for instance, said the chair of the central bank “made a serious mistake by not lowering rates of interest.” She added: “He has been warned again and again that waiting too long risks driving the economy into the ditch.”
While the Federal Reserve Interest rate cut expected in SeptemberHowever, critics are calling for the pace to be accelerated.
But all this – the sell-off, the pleas to Fed Chairman Jerome Powell, the talk of a “hard landing“ – is premature.
No panic
It's true that the most recent jobs numbers were lower than expected. It's also true that stocks closed lower the day the numbers were released. But that doesn't prove a recession is coming or that the Fed has mismanaged the economy, nor does it mean that anyone's 401(k) is in peril. It just means the economy is slowing — and, I’d add, that was to be expected.
This is since the Fed is attempting to slow the economy to scale back inflation. Since May 2022, its strategy has been to progressively raise rates of interest, which is able to slow demand and in turn reduce inflationary pressures. If successful, this strategy should lead the economy to slower growth and a lower – more stable – inflation rate, while stopping a recession. In other words, it’s the famous “soft landing.”
Moreover, the labor market data tells a more complex story than the headlines suggest.
There are signs of layoffs. The agricultural machinery giant John Deere has been within the headlines for years plans to put off around 600 employeesThe computer chip manufacturer Intel is also plans job cuts.
The report itself notes a net lack of jobs within the automotive industry, information services and temporary employment.
Of course, the impact of those job losses on individual staff and their families can’t be underestimated. But while some sectors lost jobs, others created latest ones: construction, transportation and healthcare all saw employment gains.
Such mixed signals across different sectors are quite common. They are an indication that growth in the general labor market is slowing – and that could be very different from a recession, which normally sees layoffs across the economy.
It can be value the broader context. While the most recent numbers have been disappointing, this has been the exception fairly than the rule recently. Since at the very least January 2024, the US The labor market has exceeded expectations
The US economy A whopping 272,000 latest jobs were created in Mayfor instance – significantly greater than the 180,000 that analysts had expected. At the time, some people criticized the Fed for not doing enough to slow the economy – the alternative of Warren's current criticism.
So what does the July 2024 jobs report suggest? Ultimately, in my view, it simply signifies that the economy is slowing. Higher rates of interest dampen demand, encourage slower job growth, and reduce pressure on wages and costs. That is what a soft landing looks. Even the gentlest landings can experience slight turbulence.
Before there may be further overreaction, market watchers should want to turn their attention to 2 reports coming before the Fed's September meeting: the subsequent inflation report, due on August 14, and the August jobs report, due on September 6. If the patron price index grows by 2.75% or less and jobs growth is again slower than expected, the Fed will almost actually cut rates of interest by 25 basis points in September.
While I’m sure there shall be a chorus of pundits complaining that the speed cuts shall be too small, we’re in for a period of regular rate cuts.
image credit : theconversation.com