Economist Peter Morici criticized the Biden administration’s economic policies, discussing tax cuts on Social Security benefits that former President Trump promoted during his election campaign.
Weaker than expected July employment report A reliable recession indicator The policy, closely watched by Wall Street, has rekindled concerns about the health of the U.S. economy and triggered a sharp sell-off in stocks.
In its monthly jobs report released on Friday, the Labor Department said employers added 114,000 workers last month, falling short of the 175,000 increase expected by LSEG economists. The unemployment rate jumped to 4.3%, the highest level since October 2021.
“The July jobs report is being viewed as a warning sign of a recession and the market is reacting accordingly,” said Bill Adams, chief economist at Dallas-based Comerica Bank.
The so-called thumb rule has been implemented following an unexpected rise in unemployment. Federal Reserve According to economist Claudia Thurm, this law has accurately predicted every economic downturn since 1970.
U.S. payrolls slow to 114,000 in July, unemployment unexpectedly rises
A construction worker in Raleigh, North Carolina, on July 17, 2024. (Photographer: Alison Joyce/Bloomberg via Getty Images/Getty Images)
The standard stipulates that an economy is in the early stages of a recession if the three-month moving average of the unemployment rate is at least 0.5 percentage points higher than its lowest point over the past 12 months. The unemployment rate over the past three months has averaged 4.13%, 0.63 percentage points higher than the 3.5% recorded in July 2023, exceeding this standard.
The rise in unemployment is thought to reflect a surge in layoffs. When workers lose their jobs, they cut spending, which in turn hurts businesses, which are then more likely to cut staff, perpetuating a vicious cycle. Historically, unemployment has continued to rise since the thumb rule was enacted.
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“The Sarm rule captures an important aspect of the historical data,” said Preston Caldwell, chief U.S. economist at Morningstar. “Once the unemployment rate starts rising, it’s very likely to stay rising. Rising unemployment is part of a vicious cycle of economic contraction.”
Rather than relying on a single data point that may be an outlier, the rule uses a three-month moving average to smooth out inconsistencies in the data and capture overall trends in the labor market.
Still, Sam, who designed the rule, suggested the current rise in unemployment may not signal a recession, because it’s not due to layoffs or a drop in monthly payrolls, but rather to an increase in the number of available workers, including immigrants, he said.
“We’re still in a good place, but until we see signs of stabilization and leveling out, I’m concerned,” Thurm told The Wall Street Journal.
Interest rate cuts are on the horizon, but mortgage rates may remain high
Hiring may have been disrupted last month by Hurricane Beryl, which struck the Texas coast in early July.
| Ticker | safety | last | change | change % |
|---|---|---|---|---|
| I:Comp | Nasdaq Composite Index | 16793.713686 | -400.43 |
-2.33% |
| SP500 | S&P 500 | 5341.64 | -105.04 |
-1.93% |
| Me: DJI | Dow Jones Average | 39627.32 | -720.65 |
-1.79% |
The jobs data adds to evidence that the economy is weakening against the backdrop of ongoing inflation and high interest rates, raising questions about whether the Fed can manage a soft landing.
Policy makers on Wednesday voted to keep interest rates on hold at their highest level in more than two decades but left open the possibility of a cut at their next meeting in September. A sharp slowdown in job growth and growing fears of a recession have more investors pricing in the possibility of a bigger cut of as much as 50 basis points.
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“Today’s jobs report confirms that the economy is on a weakening path,” said David Donabedian, chief investment officer at CIBC Private Wealth. “There were already concerns that the Fed was slow to cut rates, and this report reinforces those views. If the Fed doesn’t act more quickly now, the risk of a recession is increasing.”
Stocks fell sharply on Friday morning, with the Dow Jones Industrial Average dropping more than 900 points, the Nasdaq dropping more than 3% into a correction, and the S&P 500 dropping 2.6%.
