Click here to view the Custom Marketplace Update [PDF].
What a difference a month makes. Previously the jobs report has been one of robust number of new jobs added each month and an unemployment rate, that while increasing, is still healthy. Fast forward to our latest employment report and the results show a much more rapid deceleration than expected over the month.
Starting with new jobs, there were 114,000 new jobs added in July, which was far lower than the 175,000 that economists were expecting. This was also a big drop from the June payrolls added and the second smallest gain in over three years. The report also revised the June number down by 27,000 jobs, resulting in a much weaker June than was previously reported.
While the unexpected lower number of jobs added is troubling, it is unemployment that is the bigger concern. The number of initial claims for unemployment fell over the second half of last year, however since January it has been climbing again. While this was to be expected as this was one of the goals the Fed had in mind with their current rate policy. That said, the recent increase was greater than expected as there were 249,000 new claims compared to the projected 236,000 and 26,000 more claims than the first week of July.
The unemployment rate has also been increasing and rose significantly in July to 4.3%. While the overall number is still below the long-term average, the rate has become a warning sign for a possible recession. We have discussed the various indicators that can signal a recession and, until this report, only the inverted yield curve was giving a recession signal. The increase in July, however, has triggered the Sahm rule. The Sahm rule has been an accurate indicator that we are entering a recession based on the unemployment rate. The rule is triggered if the 3-month moving average is higher than the lowest 3-month moving average over the past 12 months by .50% or more. This latest unemployment report has put it across that line at .53%, giving us another indicator flashing red on a recession.
This disappointing report should add some pressure for the Fed to lower rates over the September meeting. Last week they left rates unchanged as we had expected and while there is a high probability they will start cutting rates at their next meeting, these results add some concern that they may have been better off kicking off the first cut last week.