Behind the U.S. July Employment Data Falling Short of Expectations: Economic Slowdown or Temporary Fluctuation?

The recently released U.S. employment data for July has shocked the market. The rising unemployment rate and the new jobs created were significantly below expectations, raising concerns about an economic recession. However, a close analysis of the factors behind this data may lead us to a less pessimistic conclusion.

The market reaction may be excessive

Historically, Wall Street's reaction to interest rate cuts has always been more sensitive than to rate hikes. This tendency is once again reflected in the current market's reaction to the July employment data. Although most asset prices plummeted significantly after the data was released, this may not fully reflect the true state of the U.S. economy.

The Federal Reserve does not seem to believe that the U.S. is facing a serious risk of recession. At the Federal Open Market Committee meeting in July ( FOMC ), the Fed chairman maintained a somewhat hawkish stance, indicating that they chose to remain cautious after seeing the July employment data. This attitude of the Fed may stem from the lessons learned from the overly accommodative policy in 2020, as they do not want to risk a resurgence of inflation due to premature rate cuts.

Monthly data is insufficient to determine economic trends.

The current economic situation in the United States is more accurately described as "slowing growth" rather than "deep recession." The National Bureau of Economic Research (NBER) considers multiple indicators when assessing economic recession, including personal income, employment, consumer spending, and industrial output. From these indicators, the U.S. economy is still some distance away from a true recession.

Recent economic data also shows that the U.S. economy remains resilient. The ISM non-manufacturing index for July and the initial jobless claims data for early August both exceeded expectations, which alleviated some of the extreme panic in the market.

Random Factors of Anomalies in July Data

The hurricane "Barry" that struck the U.S. in early July may have had a significant impact on employment data. According to the U.S. Bureau of Labor Statistics (BLS) report, the number of non-farm employees unable to work due to severe weather in July reached a record high, far exceeding the average level of previous years. Although the BLS claims that the hurricane had little effect on employment data, the academic and market communities generally believe this assertion is inconsistent with the facts.

The Impact of Structural Factors

In addition to short-term factors, some structural changes may also lead to an increase in the unemployment rate:

1. The increase in illegal immigration after the pandemic has caused a certain impact on the local low-skilled labor market.

2. Workers who left the labor market during the pandemic are gradually returning, which may lead to an increase in the unemployment rate in the short term.

3. The gradual reduction of government relief measures has forced some people to re-enter the labor market to seek employment.

The increase in labor supply caused by these factors may temporarily raise the unemployment rate, but in the long run, it may help curb inflation and provide more room for the Federal Reserve's monetary policy operations.

Overall, although the employment data in July was poor, the data for a single month is not sufficient to determine the direction of the economy. We need a longer observation period and more comprehensive data analysis to make an accurate judgment about the true state of the U.S. economy.