What has changed after the US NFP report?

July 8, 2024 9:52 am

Last Friday, we got the US NFP report. Now, I’m not an economist, so I try to look at it from a market participant’s perspective gathering analyses from the experts in labour market data.

Overall, the report was relatively soft. The 3-month moving average of employment gains fell to 177K, which is the lowest since early 2021. The unemployment rate ticked higher to 4.1%, but for those that like to go to the decimal place, it was actually 4.054%, so very close to being reported as 4.0%.

Guy Berger, Director of Economic Research at the Burning Glass Institute, noted on his substack that there’s been a divergence between unemployment and employment since the spring of 2023. Unemployment has gone up but we have also seen an increase in prime-working age employment.

Employment vs. Unemployment

He added that prior to the 2001 and 2008 recessions, employment and unemployment were both getting worse. This time, the increase in job search activity among the non-employed isn’t the result of falling employment.

Employment vs. Unemployment prior recessions

In fact, the entire increase in unemployment during the first half of 2024 has been due to new entrants and re-entrants. This is something we have also seen from other data like Job Openings and Jobless Claims where the softening in the labour market came from less hires than more layoffs.

Composition of Unemployment

From a cyclical perspective though, businesses generally pull back on hiring before laying off workers, but they also reduce work hours which is not something that we’ve seen in the last three reports as average weekly hours remained unchanged at 34.3. Overall, this is what full employment looks like, but the trend is still for more weakness ahead.

Average Weekly Hours

We had also good news on the wage growth front as the Y/Y rate fell to 3.9% and the 3-month annualised rate is now around 3.6% Y/Y. This is another thing that should give the Fed more confidence to start thinking about a September rate cut.

US Average Hourly Earnings YoY

There were also bad things in the report like the long-term unemployment rate that has been increasing pretty sharply in the last few months. Overall though, we can say that it was a relatively soft but decent report. Something that might not trigger recession fears but should definitely increase the confidence for at least two rate cuts by the end of the year.

At this point in the cycle though, the risk of a recession becomes high, especially with the Fed that could act too late or too slowly. Soft landings are rare because there are too many variables at work and the timing for easing needs to be almost perfect. Historically, the Fed never achieved a soft landing once inflation got above 5%.

Will this time be different? There’s always the hope but as Sir John Templeton once said “The four most dangerous words in investing are: this time it’s different”.

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