"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? - 22 November 2019
Wells Fargo Economics & Financial Report / Nov 23, 2019
Minutes from the October FOMC meeting indicated the Fed is content to remain on the sidelines for the rest of this year as the looser financial conditions resulting from rate cuts at three consecutive meetings feed through to the economy.
This Week's State Of The Economy - What Is Ahead? - 25 September 2020
Wells Fargo Economics & Financial Report / Sep 28, 2020
Existing home sales rose 2.4% to a 6.0-million unit annual pace. The surge in sales further depleted inventories and pushed prices sharply higher.
This Week's State Of The Economy - What Is Ahead? - 04 March 2022
Wells Fargo Economics & Financial Report / Mar 08, 2022
February\'s employment data showed the economy had strong momentum, but that seems pretty dated now with Russia\'s invasion of Ukraine and the Fed\'s shift to a more hawkish tone on monetary policy.
This Week's State Of The Economy - What Is Ahead? - 16 October 2021
Wells Fargo Economics & Financial Report / Oct 22, 2021
The first economic data released this week in the United States reinforced the theme that labor supply and demand are struggling to come into balance.
This Week's State Of The Economy - What Is Ahead? - 02 April 2021
Wells Fargo Economics & Financial Report / Apr 08, 2021
Increased vaccinations and an improving public health position led to an easing of restrictions and pickup in activity across the country in March.
This Week's State Of The Economy - What Is Ahead? - 10 September 2020
Wells Fargo Economics & Financial Report / Sep 12, 2020
Although the recovery from the COVID recession is still far from over, the U.S. economy is bouncing back faster than many expected.
This Week's State Of The Economy - What Is Ahead? - 28 June 2024
Wells Fargo Economics & Financial Report / Jul 04, 2024
According to the Federal Reserve\'s preferred gauge, core inflation cooled to its softest pace in more than three years in May against a backdrop of measured consumer spending and still-strong personal income.
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.
This Week's State Of The Economy - What Is Ahead? - 23 September 2022
Wells Fargo Economics & Financial Report / Sep 27, 2022
The FOMC raised the target range for the fed funds rate by 75 bps for the third consecutive time. The housing market continues to buckle under the pressure of higher mortgage rates.
This Week's State Of The Economy - What Is Ahead? - 11 June 2021
Wells Fargo Economics & Financial Report / Jun 26, 2021
Okay, so I’ve gotten about half a dozen calls since Wednesday asking if I saw the May CPI numbers that came out this week.
