Stop panicking…this is what a soft landing should look like

What a difference an employment report makes. Earlier in the summer, people worried that the economy was too hot. But now – largely in response to weaker-than-expected employment data due on August 2, 2024 – stocks are falling sharply. Some analysts even fear a recession may be on the horizon.

As a professor of business economics, I implore everyone from investors to consumers to policymakers: Please calm down, take 10 deep breaths, and relax. Taken together, the economic data paint a clearer, if more complex, picture.

Why investors are falling out of circulation

When the latest US jobs report was released, the market was not happy. “Dow falls nearly 1,000 points after report shows sharp decline in US employment,” read one headline. When the Dow closed on the day of the report, the index had lost about 2% of its value from the previous day’s close.

The sell-off intensified, with global stock markets falling even further after investors had all weekend to absorb the jobs data. The Dow, S&P 500 and Nasdaq Composite all posted losses on Aug. 5. Japan’s Nikkei also closed 12% lower, a significant drop.

The report that caused all this chaos showed that the US economy created just 114,000 jobs in July 2024 – fewer than expected (175,000).

The data was widely seen as disappointing, as CNN put it, raising fears that “the labor market is slowing too quickly and could trigger a recession.” Many news reports noted that the report triggered a measure known as Sahm’s rule, which has reliably signaled recessions in the past.

In response to this perceived recession threat, many have criticized the Federal Reserve for not cutting interest rates sooner. U.S. Senator Elizabeth Warren, for example, said the central bank chair “made a grave mistake by not cutting interest rates.” She added, “He was warned repeatedly that waiting too long would drive the economy into a ditch.”

While the Federal Reserve is expected to cut interest rates in September, critics are calling on it to speed up the pace.

But all of this — the sell-off, the pleas to Federal Reserve Chairman Jerome Powell, the talk of a “hard landing” — is premature.

Don’t panic

It’s true that the latest employment data was lower than expected. It’s true that stocks closed lower the day the data was released. But that doesn’t prove a recession is imminent or that the Fed has mismanaged the economy, and it doesn’t mean anyone’s 401(k) is in jeopardy. It simply means that the economy is slowing — and, I might add, that’s expected.

That’s because the Fed is trying to slow the economy to lower inflation. Since May 2022, its strategy has been to gradually raise interest rates, which slows demand, which in turn reduces inflationary pressures. The thinking is that if this strategy works, it will steer the economy toward slower growth and a lower—more stable—inflation rate while preventing a recession. In other words, it’s the famous “soft landing.”

Employment data tell a more complex story than headlines suggest.

It’s true that there are signs of layoffs. Farm machinery giant John Deere made headlines for plans to lay off about 600 workers. Computer chip maker Intel is also planning job cuts.

The report noted net job losses in the auto industry, information services and temporary work.

Of course, the impact of these job losses on individuals and their families should never be underestimated. But while some sectors lost jobs, others added them: construction, transportation, and health services all saw employment gains.

Such mixed signals across sectors are fairly common. They are a sign that the labor market is slowing in aggregate—and that’s very different from a recession, where layoffs are typically seen across the economy.

It’s also worth considering the broader context. While the latest data has been disappointing, that’s been the exception, not the norm, lately. The U.S. labor market has been outperforming expectations since at least January 2024

The U.S. economy added a whopping 272,000 jobs in May, for example — far more than the 180,000 analysts had expected. At the time, some criticized the Fed for not doing enough to slow the economy — the opposite of Warren’s current complaints.

So what does the July 2024 jobs report predict? Ultimately, I think it simply means that the economy is slowing. Higher interest rates suppress demand, encourage slower job growth, and reduce pressure on wages and prices. That’s what a soft landing looks like. Even the softest landing can have some turbulence.

Before they overreact, market watchers should pay attention to two reports due before the Federal Reserve meets in September: the next inflation report, due on August 14, and the August employment report, due on September 6. If the consumer price index rises by 2.75% or less and employment growth is again slower than expected, then the Federal Reserve will almost certainly cut rates by 25 basis points in September.

While I’m sure many pundits will complain that the interest rate cuts will be too small, a period of steady rate cuts is coming.