How bad was the July jobs report?

After more than a year of arguing that it’s time for the Fed to start cutting rates to avoid an economic slowdown, I feel the need to offer a bit of pushback to those now rushing to agree with me. To be clear, I absolutely believe the Fed should cut rates, and the sooner the better (a cut between meetings would be fine by me), but the talk of an economic meltdown and an impending recession is more than a little over the top.

First, let’s take a breath and look at the actual numbers. The unemployment rate in July was 4.3 percent (4.25 percent if you roll over to the next decimal point). That’s still low by historical standards, but it’s up nearly a percentage point from the 3.4 percent reached last April. More importantly, it’s up from 3.7 percent in January. A 0.6 percentage point increase in the unemployment rate over six months is definitely cause for concern.

But there is reason to believe that weather may have played a role in the increase. While the BLS memo states that it found no clear evidence of a weather effect from Hurricane Beryl on response rates, that doesn’t mean the hurricane didn’t affect the data. The most obvious is that 461,000 people reported having jobs but being unable to work because of the weather. That compares with 83,000 in June and 55,000 in July 2023.

Another 1,089,000 reported working fewer hours than usual. This compares with 206,000 in June and 164,000 in July of last year. Similarly, the number of people reporting that they were temporarily laid off increased by 249,000 in July, accounting for more than 70 percent of the reported increase in unemployment. This would support the view that the hurricane played a significant role in the increase in unemployment in July.

It’s also worth noting that not everything in the July household survey was good. Most notably, the employment-to-population ratio (EPOP) for working-age workers (25-54) actually rose 0.1 percentage points over the month to 80.9 percent, a peak for the recovery. We don’t typically see an increase in EPOP for this group of workers in recessions.

The establishment survey data is also mixed, not uniformly bad. The 114,000 jobs created this month are low compared with what we’ve seen, but it’s not clear that it’s much lower than we should have expected. The Congressional Budget Office’s last economic forecast, from before the pandemic, showed job growth of just 250,000 per year from 2023 to 2025, as the retirement of baby boomers was expected to significantly curb job growth.

Even projections from June of this year show the economy will add just 1.8 million jobs, or 150,000 per month, between the second quarter of this year and the second quarter of 2025. July’s figure is, of course, slightly lower than that number, but the average of 170,000 over the past three months is significantly higher.

These caveats about the bad news in the July report shouldn’t be taken as a question about whether the labor market is weakening. That’s obvious, and it’s supported by a lot of other data, like the declines in job openings, employment, and attrition rates in the JOLTS data. We also have private data sources like Indeed and ADP that tell a similar story. And we know that wage growth has slowed to almost pre-pandemic levels in the Average Hourly Earnings series, the Employment Cost Index, and the Indeed Wage Tracker.

A weaker job market is not a recession

But it’s important to distinguish between saying we’re seeing a weaker job market and saying we’re on the verge of a recession. The economy is still creating jobs at a respectable pace, even if not fast enough to stem the rising unemployment rate. Of particular note, the two most cyclical sectors, construction and manufacturing, are still adding jobs, albeit very slowly in the latter case. In previous recessions, these sectors began losing jobs before the recession officially began.

The two sectors combined lost 110,000 jobs in the six months leading up to the 1990 recession, 237,000 jobs in the six months leading up to the 2001 recession, and 360,000 jobs in the six months leading up to the Great Recession. In the past six months, the sectors have added 133,000 jobs. If we are on the brink of a recession, it will clearly look very different from previous recessions.

It’s also worth noting that this isn’t just a matter of correlation. There’s a logic to the idea that job losses in these sectors led to the recession. These sectors tend to pay more than the general average, both on an hourly basis (this is now less true for manufacturing, as the wage premium has been severely eroded) and because these positions have much longer average workweeks.

When there are significant job losses in these sectors, it translates into less purchasing power in the economy, which leads to a cascading effect that gives us recessions. We are clearly not on that path right now.

We can also look at weekly unemployment insurance payments. They always spike before a recession begins, as shown below. (I have not included the pandemic recession because that would destroy the scale of the chart.)

There has been a slight increase in weekly claims since reaching their lowest levels in 2022, but the latest four-week average of 238,000 is still low compared to historical levels and even lower than levels reached last summer. In short, it’s hard to look at these figures and see the economy on the brink of recession.

The Fed should continue to cut

As Chairman Powell has repeatedly noted, the Fed has a dual mandate for stable prices and full employment. The Fed appears to have maintained a unilateral focus on the price stability portion of its mandate over the past year, even as inflation has fallen sharply and the labor market has weakened. At this point, it is hard to justify a 5.25 percent federal funds rate.

Inflation expectations are now just above 2.0 percent, which means the real federal funds rate is above 3.0 percent. That is seriously restrictive. For most of the period leading up to the pandemic, the real rate was close to zero and often negative.

The Fed’s overly restrictive policies may not push us into recession anytime soon, but they could mean hundreds of thousands of people are thrown out of work because of a weak labor market. And millions of people who might otherwise leave for a better job or fight for higher pay in their current job are being denied that opportunity. And high mortgage rates continue to take a toll on the housing market.

We don’t need to scream that the sky is falling. No data supports that story. But the labor market is clearly weaker than it should be, and the Fed can help turn it around with an aggressive set of rate cuts in the second half of this year.

This article first appeared on Dean Baker’s blog Beat the Press.