"The Downside Risks to the Employment Mandate Are Real Now"
The latest monetary policy meeting came and went as expected. The Federal Open Market Committee (FOMC) made no major changes to policy, though Chair Powell's press conference was littered with hints that the Fed is getting ready to ease restrictions, likely in September. Powell stressed that the two sides of the Fed's mandate—stable prices and maximum employment—are in better balance, and that "the downside risks to the employment mandate are real now." He also mentioned the Committee is getting closer to the point where it would feel confident to dial back restrictions but that the job is not done. In short, the Fed wants to keep its options open to see how the data evolve, but the July nonfarm payroll report puts on the pressure to act soon and potentially fast.
Employers added just 114K net new jobs in July, close to the smallest monthly gain this cycle, with downward revisions to prior months' hiring as well. The trend looks discernibly lower now, but the most striking development was the 0.2 percentage point (pp) rise in the unemployment rate, which has now triggered the 'Sahm Rule.' This rule highlights that whenever the three-month moving average of the unemployment rate (currently 4.1%) rises a half-a-percent (0.5pp) off its prior 12-month low (currently 3.6%), the economy has fallen into a recession. While it's not guaranteed we're now destined to slip into one, it's hard to deny something with such a steady track record (chart).
We're in a unique environment, as the increase in unemployment has been driven more by entrants into the labor force today than at the start of prior recessions. Increased supply, or the rise in unemployment for the "right" reasons, suggests the threshold for recession could be higher this cycle.Even if that's the case, this signal should not be ignored. There was an increase in job losses last month which also helped push unemployment higher. At the end of the day, if more workers are finding it harder to gain employment, the labor market is deteriorating.
It's worth remembering some moderation is necessary to quell wage growth and help stomp out the remainder of inflation. But we're walking what feels like a fine line between healthy moderation and outright contraction. Other data this week were consistent with a fading economy. The Employment Cost Index (ECI), a comprehensive measure of labor costs, eased in the second quarter and is now striking distance to a pace consistent with the Fed's inflation goal (chart). The ISM manufacturing index also slid to an eight-month low in July as more restrictive policy hits the sector.
We expect the FOMC to begin dialing back policy restriction at its next opportunity to do so in September. We still look for the FOMC to reduce the fed funds rate by 25 bps at its September meeting followed by an additional 25 bps at every other meeting through 2024, although growing risks to the employment side of the Fed's mandate suggest more and/or a faster pace of rate cuts may be warranted. The market was quick to bake in a faster pace of easing after Friday's employment data, with 100 bps of easing before year-end now fully priced in.
This Week's State Of The Economy - What Is Ahead? - 21 October 2020
Wells Fargo Economics & Financial Report / Oct 21, 2020
Mobility is continuing to trickle lower in several major developed market economies. The U.K., France, Italy and Canada have all seen some further modest declines in retail/recreation visits.
This Week's State Of The Economy - What Is Ahead? - 01 May 2020
Wells Fargo Economics & Financial Report / May 04, 2020
U.S. GDP declined at an annualized rate of 4.8% in the first quarter, only a hint of what is to come in the second quarter.
This Week's State Of The Economy - What Is Ahead? - 03 February 2023
Wells Fargo Economics & Financial Report / Feb 04, 2023
During January, payrolls jumped by 517K, the unemployment rate fell to 3.4% and average hourly earnings rose by 0.3%. The FOMC raised the fed funds target range by 25 bps to 4.5%-4.75% this week.
This Week's State Of The Economy - What Is Ahead? - 30 April 2021
Wells Fargo Economics & Financial Report / May 18, 2021
The gain in output leaves the level of real GDP just a stone\'s throw below its pre-COVID Q4-2019 level (see chart).
This Week's State Of The Economy - What Is Ahead? - 22 April 2022
Wells Fargo Economics & Financial Report / Apr 27, 2022
I’ll wish you a Happy Earth Day anyway. Don’t expect a card this year. While the Earth continues to thankfully revolve at a steady rate, rising mortgage rates appear to be slowing residential activity
This Week's State Of The Economy - What Is Ahead? - 21 August 2020
Wells Fargo Economics & Financial Report / Aug 18, 2020
Despite indications of lost momentum elsewhere, residential construction activity is picking up steam.
This Week's State Of The Economy - What Is Ahead? - 11 February 2022
Wells Fargo Economics & Financial Report / Feb 14, 2022
Deep thought for the week, if a tree falls in the forest, or an Olympics occurs, and no one is there to hear it or see it, did it really occur?
This Week's State Of The Economy - What Is Ahead? - 25 October 2024
Wells Fargo Economics & Financial Report / Oct 31, 2024
The housing sector was in focus this week. During September, existing homes sales remained in a slump and declined to a fresh cycle low, while new home sales bucked the trend and rose solidly.
This Week's State Of The Economy - What Is Ahead? - 23 July 2021
Wells Fargo Economics & Financial Report / Jul 30, 2021
In the biggest financial news this week not connected to college football conference realignment, July\'s NAHB Housing Market Index slipped one point to 80.
This Week's State Of The Economy - What Is Ahead? - 29 September 2023
Wells Fargo Economics & Financial Report / Oct 02, 2023
On the housing front, new home sales dropped more than expected in August, though an upward revision to July results left us about where everyone expected us to be year-to-date.
