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Nonfarm payrolls rose by a much weaker-than-expected 114,000 jobs in July (consensus at 175,000), while the unemployment rate (U-3) soared to its highest level in three years at 4.3%, triggering the dreaded Sahm Rule. That states that, if U-3 rises 0.5% or more on a rolling 3-month basis within a year, the economy typically slows into a recession. The Sahm Rule is now at 0.53%, spooking investors. 

In its June 2024 Summary of Economic Projections, the Federal Reserve forecast a 4.2% unemployment rate by the end of 2025, which in retrospect was overly optimistic. We now expect the Fed to cut interest rates by a quarter point at its next policy-setting meeting on September 18. 

Manufacturing ISM index disappoints Yesterday, the ISM manufacturing index posted a much weaker-than-expected nine-month low of 46.8 in July (consensus at 48.8), marking the 20th time out of the past 21 months in which the index was below the contraction level of 50. In addition, the employment component fell of a cliff, plunging to 43.4 last month from 49.3 in June. To complete the stagflation troika, the prices paid component rose to a higher-than-expected 52.9 in July (consensus at 51.8). 

Risk-off markets Economic data has weakened materially across the board over the past fortnight, sparking a long-anticipated shift in sentiment among investors. Benchmark 10-year Treasury yields have plunged from nearly 4.3% on July 24 to 3.8% today in a massive flight-to-safety rally. Meanwhile, the S&P 500 has fallen more than 6% from its record high on July 16 and the Nasdaq composite is down twice that.

Downward revisions Private payrolls also disappointed, posting a gain of only 97,000 jobs in July (consensus at 140,000). Plus, the Labor Department revised the May and June reports by a combined 29,000. So, the adjusted gain in July was a tepid 85,000, less than half the expected 175,000 job gain.

Huge seasonal adjustment The Dept. reported an unadjusted loss of 915,000 jobs in July. But it typically makes substantial upward seasonal adjustments in January and July, which is why we were forecasting an above-consensus gain of 190,000 workers in July. This year, the Dept. seasonally adjusted nonfarm payrolls up by 1.029 million workers to arrive at this morning’s nominal gain of 114,000 jobs. Also, Hurricane Beryl impacted the labor market last month. The storm made landfall in Texas during the July survey week, and 436,000 people in nonfarm jobs were unable to work as a result. The average weather-related impact during July over the past half century is only 32,000 jobs. Moreover, another 1.08 million people who usually work full-time could only find part-time work in July due to the inclement weather. 

Several important labor-market indicators were soft: 

• ADP private payroll survey July added a weaker-than-expected 122,000 jobs (consensus at 150,000), a six-month low, down from 155,000 jobs in June. Workers who changed jobs last month saw their wages rise by a 38-month low of 7.2% year-over-year (y/y) (peak of 16.4% in June 2022). Job stayers in July experienced their slowest wage growth in three years, with a modest increase of 4.6% y/y, down from a peak of 7.8% in September 2022. 
• Initial weekly jobless claims This high-frequency leading indicator leapt to a 1-year high of 249,000 for the week ended July 27. Continuing claims soared to nearly 1.88 million for the week ended July 20, the highest since November 2021.
• Challenger, Gray & Christmas layoffs Employers announced the fewest layoffs in a year at 25,885 in July, down 47% sequentially, although they were 9% higher than a year ago. Nearly a quarter of last month’s layoff announcements were in technology.
• Job Openings & Labor Turnover Survey (JOLTS) June job openings slipped 1% sequentially to 8.184 million, 33% below a record 12.182 million job openings in March 2022. The rate of job openings remained steady at 4.9%, compared with a 3-year low of 4.8% in April, which is down from a record 7.4% two years ago. The ratio of available job openings for every unemployed worker held steady in June at a 3-year low of 1.2, down from a peak of 2.0 in March 2022. The number of voluntary quitters declined 3.6% to 3.282 million in June, and the quits rate held steady for the second consecutive month at a 4-year low of 2.1%. This metric peaked at 3.0% in April 2022. 

Wage inflation eases while hours worked fall Average hourly earnings rose 0.2% month-over-month (m/m) in July and by a 3-year low of 3.6% y/y, down from 3.8% in June. The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked ticked down to a 6-month low of 34.2 in July. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to cut hours before they downsize staff. 

Immigrant impact on labor market More than 10 million migrants have streamed across the southern U.S. border over the past four years, and many of them have taken jobs here, either officially or as part of the underground economy. As a result, the number of foreign-born workers (aged 16 years and over) has increased by more than 1.3 million over the past year (a 4.3% increase), with a worker participation rate of 67.3%. But the number of native-born workers has decreased by more than 1.2 million over the past year (a decline of 0.9%), with a much smaller participation rate at 62.3%. This mix shift is likely helping to reduce wage inflation overall. 

Unemployment, labor impairment and participation rates rise Household employment (another leading employment indicator) added 67,000 jobs in July, compared with a gain of 116,000 workers in June and a loss of 408,000 jobs in May. The number of unemployed people rose by 352,000 in July, up from 162,000 in June, 157,000 in May and 63,000 in April. So, U-3 increased to a 3-year high of 4.3% in July, up from 4.1% in June and April 2023’s 53-year low of 3.4%, triggering the Sahm Rule. The labor impairment rate (U-6) also rose to a 3-year high of 7.8% in July, up from 7.4% in each of the three previous months and well above the cycle low (dating back to 1994) of 6.5% in December 2022. 

The civilian labor force rose by 420,000 workers in July, up from a gain of 277,000 workers in June and a loss of 250,000 workers in May. The participation rate ticked up to 62.7% in July, up from 62.6% in June and 62.5% in May. That’s just under a post-pandemic high of 62.8% in November 2023, while the pre-pandemic cycle high was 63.3% in February 2020. 

K-shaped recovery gap widens The rate of unemployment for highly educated workers slipped a tick to 2.3% in July, compared with September 2022’s cycle low of 1.8%. But the rate of unemployment for less-educated workers soared to 6.7% in July, up from 5.9% in June and the 31-year low of 4.4% was in November 2022. 

Sector details mixed: 

• Temporary help (a leading indicator) lost 9,000 jobs in July for the 17th time in the past 18 months. 
• Manufacturing added a better-than-expected 1,000 jobs in July (consensus was for a loss of 5,000 jobs), versus a loss of 9,000 jobs in June, job gains of 3,000 in May and 7,000 in April, and losses of 6,000 in March and 9,000 in February. 
• Construction remained strong, adding 25,000 jobs in July, up from gains of 20,000 in June and 13,000 in May and a loss of 5,000 in April.
• Retail added 4,000 jobs in July after shedding 12,000 in June, as we’re deep into the important Back-to-School season, which we expect will be tepid. 
• Leisure & hospitality added 23,000 workers in July, much better than the modest 1,000 new jobs in June. May added 18,000 jobs, but April lost 9,000. 

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