Is Powell’s ‘soft landing’ slipping away? Job worries cloud Jackson Hole speech
Jackson Hole, Wyoming, is known for its temperate summers, but Federal Reserve Chair Jerome Powell is probably feeling the heat turn up a bit ahead of his most-anticipated speech of the year. Powell will speak Friday, Aug. 23, at the Kansas City Fed’s annual economic symposium at Grand Teton National Park.
“This is his opportunity to send us a clear message on some aspect of what the Fed is thinking about,” Kathleen Hays, editor-in-chief of Central Bank Central, said. “I don’t think it’s going to be just looking at the economy and inflation. He’ll probably put this in a bigger context. At the same time, I think people are going to be waiting for him to just give us a little more guidance on where you’re leaning now.”
On Wednesday, the Fed released minutes from the latest Open Market Committee meeting in July. It decided to keep rates the same two days before a disappointing jobs report rocked people’s views of the labor market.
According to the minutes, the vast majority of people in that meeting expressed that it would likely be appropriate to cut rates in September. That said, several made comments that they could have also gotten behind a cut in July, which didn’t happen.
But here’s the kicker: Many participants noted that reported payroll gains might be overstated, and some noted the easing labor market faced a higher risk of more serious deterioration.
Now, it is confirmed that payroll gains have been overstated, just as many of those Fed members suspected.
“Since January of 2023, we’ve seen one downward revision after another to the data — it’s become systematic,” QI Research CEO Danielle DiMartino Booth told Straight Arrow News in August.
The latest Labor Department revision shows the U.S. economy added 818,000 fewer jobs than previously reported over 12 months ending March 2024. That’s about a 30% hit to what the Bureau of Labor Statistics initially released. It doesn’t mean those jobs were lost, it means they were never there in the first place. Therefore, while the labor market was still strong over those 12 months, it wasn’t on quite the tear the initial data indicated. These estimates will not be finalized until February 2025.
“And it takes a lot of time for the Bureau of Labor Statistics data to work its way into subsequent revisions for the Bureau of Economic Analysis data for GDP,” DiMartino Booth noted of revisions.
All of these moving parts are putting the Fed’s soft landing scenario at risk. A soft landing is being able to come down from too-high inflation without triggering a recession.
Inflation has come down quite a bit. The Fed’s preferred inflation measurement (core PCE) is at 2.6%, close to its 2% target. And the softening labor market is all the more reason to act.
In Powell’s speech Friday listeners will hope to hear from him that a soft landing is still in sight.
“We know the Fed’s going to be cutting rates,” Hays said. “We know they’re going to normalize. So it’s more of a question of when and how much and how fast.”
Complicating matters is the upcoming election. The Federal Reserve is a politically independent body and it would never want to be seen as carrying water for one party or another.
There is only one meeting before the election, on Sept. 17-18. Taking politics out of it, most economic signs point to the need to cut rates in September. But that will likely give the economy a boost, and that’s why in an interview with Bloomberg, Donald Trump said cutting before the election is “something that they know they shouldn’t be doing.”
The next Fed meeting starts the day after Election Day, but the Fed may not wait that long with the labor market showing these cracks.
The real reason China’s educated youth can’t find jobs
They were told with hard work and a good education, they’d get the career of their dreams. But for many young adults in China, that is simply not the case.
For a couple of years now, there have been rumors about the “lying flat” or “let it rot” youth in China, a characterization that the kids are lazy and don’t want to work. But there’s more to the story in the world’s second-largest economy.
Some recent graduates are dishing out more money than they can hope to make in a job for interview coaches and job agents. A Bloomberg article said some students are paying $50,000 to try to land a finance job. And still, it’s not enough.
China’s youth unemployment surged to 17.1% in July, up from 13.2% a month earlier, according to the latest government data. This new measure of youth unemployment excludes current students. Experts say the July spike is in part because of students who graduated in June.
In 2023, China’s jobless rate for 16- to 24-year-olds reached 21.3%, so high the government stopped reporting the data. The government later agreed on a new method to exclude students.
Now these young graduates have a new name: “rotten-tail kids.” It comes from the millions of unfinished homes that litter the country known as “rotten-tail buildings,” real estate dreams that never came to fruition.
“There is an entire generation of children who have grown up under the one-child policy,” said Doug Guthrie, a China scholar and professor of global leadership at Arizona State University’s Thunderbird School of Global Management. “Those children have two parents and four grandparents who have very much focused on their well-being. And maybe they’ve become a little bit more willing to wait and think, ‘Well, if I don’t get the perfect high-end service sector economy job that I want, I’ll just continue to live at home.’”
Can China turn its youth unemployment problem around? Watch the full interview with Doug Guthrie in the video above.
Fed cutting rates before September like ‘yelling fire in a crowded theater’
Many argue the Federal Reserve missed the boat after failing to cut rates to ease financial conditions two days before latest jobs report triggered a recession indicator on Friday, Aug. 2. The Federal Open Market Committee is not scheduled to meet again until Sept. 17-18.
Now, experts are making the case for deeper rate cuts in light of rising unemployment. Some are even suggesting the Fed issue an emergency rate cut between now and the September meeting.
It would, at this point, be akin to yelling fire in a crowded theater if they were to come in with an emergency rate cut.
Danielle DiMartino Booth, CEO, QI Research
Former Fed adviser and CEO of QI Research Danielle DiMartino Booth said that while the Fed is behind the ball, an emergency cut would do “more harm than good.” In an interview with Straight Arrow News, she talked about the signs Fed Chair Jerome Powell missed that led to July’s decision.
The following transcript has been edited for length and clarity. Watch the full interview in the video above.
Simone Del Rosario: I know you have been warning about these underlying symptoms of recession for some time. The Fed chose not to cut in July and then two days later had this jobs report that wrecked the markets for a moment. Where are you? Are they okay to wait until September to cut? Do you want to see something from them in the meantime?
Danielle DiMartino Booth: It would, at this point, be akin to yelling fire in a crowded theater if they were to come in with an emergency rate cut. Those are usually reserved for end of the world type of moments, financial pandemics, financial crises, credit events. So I think at this point it would do more harm than good.
I was strongly of the mind that they should have cut rates at the July meeting. At the podium, when he was pressed, [Fed] Chair [Jerome] Powell did acknowledge that there was a discussion about whether or not to cut rates in July. So you know that even though the decision was unanimous, there were no dissents, that there were some who believed that they should have started in July.
This is nothing new, companies aggressively laying off. Again, it’s been occurring for most of 2024 and yet [Powell has] been ignoring it.
Danielle DiMartino Booth, CEO, QI Research
There’s a company called MacroEdge and they do a very transparent job of tracking job cut announcements. We’ve had an average of 100,000, more than 100,000 job cuts announced over the last four or five months here in a time of the year that is typically benign. Usually you see your worst month of the year be January, that’s when the CEO and the CFO come in and clean house. But April was worse and it’s been just awful ever since then. For heaven’s sake, we’re seven days into the month of August and we’ve already seen 40,000 job cuts announced.
We’re talking about Jay Powell here, he founded the Industrial Group when he was at The Carlyle [Group]. He speaks to lot of CEOs. He knows that they’re in the process of reducing their head count. So just in terms of data on the ground, anecdata, it’s all around him and it’s been all around him.
This is nothing new, companies aggressively laying off. Again, it’s been occurring for most of 2024 and yet he’s been ignoring it. So I really do think that he should have [cut rates] on July 31.
The reason I think that we’ve seen the Wall Street Journal mention 50 basis points is because that’s now become a base case for September 18 or we wouldn’t have read it in the Wall Street Journal.
Simone Del Rosario: We are going to get another month of jobs data before the Fed meets again. What sort of labor picture do you think it’s going to paint when we look up the first Friday of September to see what happened in August?
Danielle DiMartino Booth: I mean, anything is possible with this Bureau of Labor Statistics. I’m done guessing what they’re going to do and what they’re going to report. When the data is eventually revised by law, we see where it really, really is.
For me at least, because there is this systematic downward revision of the data, I just feel like it’s a politicized institution at this point. And I don’t say that lightly, and I’m certainly not trying to be insulting to anybody inside the organization.
I just feel like [the Bureau of Labor Statistics is] a politicized institution at this point. And I don’t say that lightly.
Danielle DiMartino Booth, CEO, QI Research
But you typically see the unemployment rate continue to increase after it’s stopped rising by a tenth of a percentage point. It’s what you’ve seen in many, many recessions looking back: Initially there’s a very gradual rise in the unemployment rate and then it really starts to take off. And we are seeing companies being much more aggressive and large with their layoff announcements and it is actually manifesting in the jobless claims data as well.
Simone Del Rosario: Is it politicized or are they just not as accurate at this point? Is the survey outdated or do you firmly believe that there are underlying political reasons why the picture is rosier when they first paint it than it turns out to be later?
Danielle DiMartino Booth: Again, we are having this discussion in August 2024 and we’ve been seeing downward revisions since January 2023. If, at this point, there has not been an internal recognition that the model is broken and it’s been addressed, then it’s what we call willful blindness.
So at some point you have to recognize that something is broken and address it, not just ignore it, unless you’re ignoring it willfully. And again, I’m not trying to be insulting of the institution, but we’ve just seen a headline in a $25 trillion economy that funding for the household survey is going to be cut. That’s the most ridiculous thing I’ve ever heard in my life.
In a world in which we have big data, artificial intelligence, ways to streamline operations, make certain practices and methodologies more efficient, that we can’t better track the U.S. labor force, it just seems nonsensical to me.
Here’s why this former Fed adviser says we are already in a recession
The creator of a recession indicator that was triggered this past week said her rule is broken this time around and there’s no recession right now. But not everyone agrees. In fact, a different recession indicator points to the U.S. having entered a recession in October of last year.
“We’re not in a recession,” Sahm Rule creator Claudia Sahm told Straight Arrow News. “It’s never time to panic, but it’s also not recession time either. So it’s not a recession. And yet the risks are there.”
Recessions are declared by the National Bureau of Economic Research in hindsight by looking at the economy’s growth over previous quarters. Recession indicators like Sahm’s look at rising unemployment rate trends for more immediate indications the country has entered a recession.
While Sahm’s rule was triggered by last week’s release of July’s jobs data, a different recession indicator was set off last October. In simple terms, the McKelvey Rule hits when the three-month average rise in unemployment hits 0.3 percentage points above the year’s low, compared to Sahm’s 0.5-percentage-point threshold.
The following transcript has been edited for length and clarity. Watch the full interview in the video above.
Danielle DiMartino Booth: I do think we’re in recession. Everything that we’ve seen from the Bureau of Labor Statistics with regards to the fourth quarter of 2023 indicates that they’re going to be revising into negative territory the final three months of 2023.
So that would stretch job losses from the third quarter of 2023 – when there were 192,000 jobs lost in the United States – that would stretch that into the fourth quarter and give us a six-month stretch of job losses upon revising the Bureau of Labor Statistics survey data with the hard data that we get from the Census Bureau, where companies are legally obligated once a quarter to report their headcount.
And that’s kind of the ultimate decision. That’s when the ink dries, if you will, on the payrolls data that we see the Bureau of Labor Statistics release.
Simone Del Rosario: So we’re looking at a recession that would have started in October of last year?
Danielle DiMartino Booth: I personally see the recession as having started in October 2023 because that’s the first time that the McKelvey Rule, which is less arduous than the Sahm Rule – and it doesn’t date back to 1948, it dates back to 1968 – but it has not missed a single recession since then.
Rather than a 0.5-percentage-point increase in the unemployment rate off of its lowest level in the prior 12 months, it is a 0.3-percentage-point increase in the unemployment rate over the prior 12-month period’s low.
Again, it has a spotless track record since 1968. It was triggered in October of 2023. The Bureau of Labor Statistics said that we lost 192,000 jobs in the three months ending Sept. 30, 2023. So the National Bureau of Economic Research could theoretically backdate it further, but again, the McKelvey Rule is what I’ve relied on.
The former chief economist at Goldman Sachs, he was interviewed by the Wall Street Journal in January 2008 when his rule was triggered, and he was asked the same question: ‘Well, your McKelvey Rule was triggered in December of 2007. Do you think we’re in recession?’ And he said, ‘Well, you know, my rule might be broken,’ basically.
But of course, the NBER did backdate that recession to December 2007 and the McKelvey Rule was not broken. Luckily, the Bloomberg Economics team agrees with me that recession, that job losses started in October 2023.
Simone Del Rosario: Why isn’t the Federal Reserve looking at these data points?
Danielle DiMartino Booth: I think the Fed is choosing to look the other way in this instance. There are some regulations that the Fed has been working on that could really define Chair Powell’s legacy – that would begin to regulate the private equities, the hedge funds, the BlackRocks of the world that are in some cases larger than banks if you consider the trillions of dollars that they have under management – and in order to push through with some of these regulations, he really does need higher-for-longer [rates] on his side.
He needs the higher-for-longer policy enough to go with what the Bureau of Labor Statistics first reports, even though we know that since January 2023, we’ve seen one downward revision after another to the data. It’s become systematic, in fact, the persistence with which we’ve seen downward revisions to what’s first reported. But again, I think [Fed Chair Jerome] Powell’s got his own reasons.
Simone Del Rosario: How do you square this idea that we could be in a recession right now with the GDP numbers that we’re seeing? The latest reading, the advance estimate, showed an annual growth rate of 2.8%.
Danielle DiMartino Booth: So we had 2-point-something percent in 2001 when it was first reported. Of course, it was another six quarters later that we revised it and found out that it was a negative number.
It takes magnitudes of the amount of time to get correct unemployment data, correct payrolls data. You can double the time that it takes to figure out what the actual GDP is that’s associated with that time frame.
If you find out that you’re 830,000 jobs shy of what you thought you were, which is what we found out in the third quarter of 2023 looking backward with hard data in hand, then you have to subsequently go back and back out. Well, 830,000 people were not actually working; 830,000 people were not actually producing the economic output that we thought we were. So you’ve got to back that out.
It takes a lot of time for the Bureau of Labor Statistics data to work its way into subsequent revisions for the Bureau of Economic Analysis data, for GDP.
It’s at inflection points. It’s when contractions become expansions, when expansions become contractions, that these big statistical agencies have trouble seeing the turning point, given their modeling.
But it wasn’t until 2018 that we saw the final GDP revision from the Great Recession that ended in June 2009. Again, the recession ended June 2009. We didn’t get the final revision for GDP for that recession until 2018.
Simone Del Rosario: On one hand, this can seem incredibly frustrating if people feel like we’re in a recession, they feel like the economy’s not good, and yet we continue to get, on the surface, economic releases that show a pretty strong economy. But that said, if, to your point, we are already in a recession, does that take some of the panic away since we’ve already been going through it, or is it going to get worse? What’s your read on that?
Danielle DiMartino Booth: Well, your average recession is 10 months long in the post-war era. So using that average length of time, we should theoretically be starting to recover and coming out of recession.
That being said, the Federal Reserve has waited now 12 months, now longer than 12 months, and the longer it waits, typically the deeper and longer the recession is as a result.
There have been some great studies that empirically demonstrate this. The period leading up to the Great Recession, 2007-2009, the Fed waited 15 months. It’s the longest the Fed’s ever waited.
So we’re just at the 12-month mark now. But it certainly looks like we’re going to get to the 14-month mark if it’s Sept. 18 that we can anticipate that first rate cut. So that’s about as long as the Fed has ever waited to provide relief in the form of the beginning of an easing cycle.
Why the Sahm Rule creator says the recession rule is wrong this time
Recession fears have dominated headlines since Friday’s jobs report, where the rising unemployment rate triggered a recession indicator known as the Sahm Rule. The rule has an incredible track record of signaling the start of a recession, yet this time is an outlier, according to the rule’s creator.
The Sahm Rule states a recession in the U.S. has started when the three-month average of the unemployment rate crosses 0.5% or more relative to its low from the previous 12 months. July’s surprise unemployment rate of 4.3% triggered the Sahm Rule with a 0.53% rise.
Asked point-blank whether the U.S. is in a recession, Claudia Sahm told Straight Arrow News, “No, we are not.”
It’s not a recession and yet the risks are there because we do have these increases in the unemployment rate.
Claudia Sahm, Chief Economist, New Century Advisors
The following transcript has been edited for length and clarity. Watch the full interview in the video above.
Claudia Sahm: We should be concerned that [the unemployment rate] has been rising over the past year. And this is not just about hitting a particular level, or in July, we saw a larger jump than we’ve seen. The Sahm Rule averages across months. It looks over a year-long period. So it’s trying to get this direction that we’re headed and it’s not a good direction.
Now there are some very specific reasons, very special reasons that the Sahm Rule right now looks more ominous than it is. And the first thing we can say about, “we’re not in a recession,” is anytime we make a pronouncement like that, we should look around.
And in fact, broadly speaking, this economy is still growing and a recession means that it’s contracting, right? So we still see consumer spending, we’re adding jobs, industrial production. It’s slowed down, it’s not growing as fast, but we’re still growing. So that’s not a recession – right now.
So what’s going on with the unemployment rate? So there’s the bad reason unemployment rate goes up is there’s less demand for workers, it gets harder to find jobs. Hiring rates have come down a lot. It is a lot harder if you’re on the outside trying to find a job right now. So the unemployment rate has gone up for a bad reason. It does that in recessions.
The unemployment right now is also going up for one of the good reasons. So we have had more people join the workforce who weren’t working before. In particular, there was a big increase in immigration. And that was so important for solving the labor shortages that we’ve been suffering through. And yet, it takes time to adjust. I mean, that should be the theme of this cycle since the pandemic, that big messy changes take time and it’s painful.
It can make it really hard to read where the economy is, but right now we have people who’ve come in, and for some of them, it’s just going to take time for them to find jobs. And in that period, the unemployment rate will go up. Once they find the jobs, it can come back down. And frankly, people coming in to work, that’s a good sign for keeping the economy growing because there are more workers. That extra piece of unemployment rate increase looks bad but actually, it’s probably not.
I can say, looking broadly, what we know about the economy, we’re not in a recession. I mean, it’s never time to panic, but it’s also not recession time either. So it’s not a recession and yet the risks are there because we do have these increases in the unemployment rate that are of the more problematic kind, we just don’t know exactly how much.
Simone Del Rosario: When you created this rule, it was so policymakers could act on signs of a recession. Looking at what’s happening right now, there’s obviously a major movement happening with unemployment. What’s the remedy?
Claudia Sahm: There is a very clear policy lever out there to be pulled and that is the Federal Reserve beginning to reduce interest rates. And that’s the most straightforward one at this point. And the Fed has told us they are pointed at doing that.
Before we found out about July’s employment report, that’s the path they were on. Seeing that there is probably more weakness or at least more slowing in the labor market than we had previously thought, that probably means that they can get going in September, and maybe even cut interest rates more quickly than they had expected.
And it’s important that they have that lever to pull. It’s so important that we’re still in a position of strength. We’re not in a recession, we are still growing, there’s a lot of good things in U.S. economy.
The direction is not good, right? We don’t need to soften or weaken more than we have and that’s kind of where we’re pointed. And the realization that the Fed has been putting pressure on the economy to slow it down and for them to say, “Okay, we don’t need to slow it down anymore,” and reduce risk, that is the release valve to this that can get us to a good place.
That we just kind of settle into the jobs catch-up, we keep growing, we stay away from the recession. That’s the path. And you can tell the story and the path is there. It’s just anytime you get close to these real risky places in the economy, like a recession, you have to be careful because the people can get scared, markets can react. Things can unfold in unpredictable ways. So I think people should have their guard up more than a typical time and yet, there’s still a path to this all being just fine.
Simone Del Rosario: Are you concerned about a near-term recession or are you confident that when the Fed pulls that lever, the risk is over?
Claudia Sahm: I’m a macroeconomist. I’m always concerned. I devoted much of my career to studying recessions and how to fight them. And so I think it’s a risk that we should always be aware of, or at least policymakers should certainly be aware of. It is not my base case.
And again, I don’t want to make light of the Sahm Rule. The pattern I identified, there are other similar people looking at labor market conditions, it’s not like I’m the only one who’s pointed to weakness right now.
It does have a really strong track record and I don’t want to dismiss it out of hand. Something is happening and I don’t want to just write off any of the bad signs because now would be the time to act on them. Given all that, I think the risks are there. They’re not overwhelming. And because we’re still in a position of relative strength, that gives us a real leg up in terms of like what happens over the next three months, six months, 12 months.
Simone Del Rosario: Did the Fed make a mistake last week by not cutting?
Claudia Sahm: I have made the argument for much of this year that the Federal Reserve should begin to gradually lower interest rates, that inflation was coming down. Yes, the beginning of the year was a little rough. We’re also learning that we probably got head-faked by some of that data. We might be getting head-faked by some of the employment data now. It might not be as bad as it looks, right? But there was definitely a case, inflation is coming down, the Federal Reserve should get out of the way.
I had said last week they should start gradually reducing rates because it would be so much better to gradually reduce interest rates, watch the effects on the economy, because there are many question marks. We don’t know exactly how this amount of interest rate cuts translates into that amount of spending. So just to kind of watch and see what the economy does.
Hindsight’s 20-20. I think they could have been the winner last week if they had gone ahead with a cut, but you don’t get to go back and redo. I firmly believe they will assess the situation and take the steps necessary. It takes time for their tools to work so they do need to get going. But it’s not like all is lost. They’re going to have to probably play some catch up and they won’t get to do the victory lap.
Simone Del Rosario: The Fed is finding itself back in a position that it was when it started the hiking campaign, which was that it started hiking too late and then they were doing massive hikes. There’s all this talk now about how much more they may have to cut in September and beyond. Do you think that’s overblown?
Claudia Sahm: This cycle was always going to be messy. This has been a very hard-to-read economy. If you think about it, 2022, the Fed went really fast. They raised interest rates really quickly. There were a lot of concerns that we were going to be in a recession, that that was going to be part of what we had to have happen to get inflation down because it had gone up. Well, in fact, two years later, there has been no recession and we had a big disinflation.
It was not pretty in terms of how you would necessarily want the policy to roll out, but things worked out relatively well. So just because it doesn’t have this elegant, gradual cuts, it’s about getting the job done.
It clearly creates strain on families and businesses when they see the stock market, big numbers moving and what comes next. Fear can take on a life of its own and that is something that lives around the edges and in the middle of a recession. So you don’t want to treat those dynamics lightly, but we’ve dealt with a very uncertain, hard-to-read world for the last four and a half years. So we’re not done with the drama.
It was a missed opportunity by the Fed. At least that’s what it looks like today. We’ll get inflation data next week, maybe it doesn’t. But it looks like that was a missed opportunity, but there are so many more opportunities ahead of them to do good policy.
After July’s big jobs miss, experts say a 50bps cut should be on the table
Experts are criticizing the Federal Reserve for being behind the ball after July’s jobs report showed a weakening labor market, two days after the Fed decided to leave its interest rate unchanged. Economists say the Fed’s restrictive monetary policy is now hurting the once-robust labor market.
In July, the U.S. economy added 114,000 jobs, a huge miss from the 175,000 jobs expected. Unemployment ticked up to 4.3% from 4.1% in June.
“I think that all of those indicators tell us that the Fed needs to act. They should have acted in their last meeting, maybe even a little earlier than that,” said Seth Harris, former Acting and Deputy Labor Secretary under President Barack Obama. “Now the question is, how big of a bump do they need to give? Is it 25 basis points? Is it 50 basis points?
“Let me just say, nobody was talking about 50 basis points before this report,” he added. “I think we’re now going to see people talking about 50 basis points and some folks will even talk about more. So I think that this report really sends a signal to the Fed. The boat is pulling out, the train is leaving the station, whatever analogy you want to use, and they need to get on board.”
Fed Chair Jerome Powell hinted that a September rate cut could be on the table during a press conference Wednesday, June 31, ahead of Friday’s jobs report.
The Fed is holding its interest rate at a two-decade high in an effort to tame inflation, but Harris said the weakening labor market requires a more decisive approach.
“Go ahead and cut rates aggressively and send an indication that you really are concerned about growth and you’re also concerned about employment,” Harris told Straight Arrow News. “To me, a 25 basis point cut was signal sending. It wouldn’t have had a dramatic effect on the economy directly, but by sending the signal that their concerns about inflation have been reduced, that inflation descended to a level that suggests that we’re going to be just fine in that area, but that they are also concerned about growth and employment.
“That was signaling, not policymaking. Now, I think they have to think about policymaking. After seeing these numbers, I think they have to think about policymaking.”
Weak jobs report and uptick in unemployment ‘a warning sign’
Hiring fell considerably and unemployment rose in July. The unemployment rate was up for the fourth straight month as eyes turn to whether or not U.S. economic policymakers will act in the coming months.
Employers added only 114,000 jobs in July, according to data released Friday, Aug. 2, by the Bureau of Labor Statistics. That number missed economists’ expectations of 175,000. Meanwhile, the unemployment rate in July ticked up to 4.3% from 4.1% in June. The unemployment rate is at its highest level since October 2021.
“That is a meaningful slowdown,” former Acting and Deputy U.S. Labor Secretary Seth Harris told Straight Arrow News Friday morning. “It’s still a positive number. It’s certainly not a sign of a recession, but it absolutely is a warning sign.”
The number of unemployed people increased by 352,000 to 7.2 million in July.
“That is a troublesome number, we are actually beginning to see a meaningful increase in the number of people who are unemployed,” Harris added.
Meanwhile, the number of long-term unemployed workers, those who are jobless for 27 weeks or more, sits at 1.5 million in July, up from 1.2 million one year ago. Long-term unemployed workers account for 21.6% of all unemployed people.
The labor force participation rate, or people who are either in a job or actively looking for a job, didn’t change much in July and sits at 62.7%.
“That means people aren’t completely abandoning ship and leaving the labor market and just giving up all hope that they’re going to be able to find a job,” Harris said of labor force participation. “That would really be a troublesome indicator. So we’re not there yet. These numbers are not crisis numbers, but they are an indication that the Federal Reserve is at real risk of missing the boat, of being too late to the game when it comes to making sure that jobs continue to grow and that workers have good opportunities in the labor market. That’s part of their dual mandate. Inflation is not supposed to be their only concern.”
The Federal Reserve’s dual mandate is price stability and maximum employment. That means an inflation rate around 2% and a labor market where most everyone who wants a job can find one.
The Fed has been aggressively addressing inflation, which is down to 3% from a 9% peak two years ago, according to the consumer price index. That has translated to interest rates that are at a two-decade high.
Americans have been waiting for relief from the Fed in the form of rate cuts. The Fed funds rate, which affects interest rates on nearly every loan, currently sits at around 5.33%.
What the June jobs report tells us about the state of the economy
The June jobs report came back a bit of a mixed bag. On the one hand, the U.S. economy added slightly more jobs than expected at 206,000. On the other hand, the unemployment rate ticked up to 4.1%.
It’s the first time the unemployment rate has been above 4% since late 2021. Analysts had expected unemployment to stay at 4% and anticipated around 200,000 jobs added.
“The big downward revisions to April and May are the story,” Charles Schwab Chief Fixed Income Strategist Kathy Jones said on X. “Job market is slowing down.”
Historically, an unemployment rate of around 4.1% is strong. But since the economy has been below that for 2.5 years and reached a five-decade low of 3.4% unemployment in 2023, the upward trend is catching attention.
The Federal Reserve last projected unemployment would be at 4% for 2024 and 4.2% for 2025, so already exceeding that 2024 number makes a rate cut look all the more likely. The Fed is now projecting one rate cut this year. The market is betting the Fed will hold steady for its July meeting and cut in September.
Back in May, Fed Chair Jerome Powell said there are two paths to cutting rates.
“That we do gain greater confidence that inflation is moving sustainably down toward 2% and another path could be unexpected weakening in the labor market, so those are paths in which you could see us cutting rates,” Powell said.
The Fed’s preferred inflation gauge shows prices rose 2.6% annually in May. The more widely-cited consumer price index shows a 3.3% rise in prices. Meanwhile, wages are outpacing inflation, rising 3.9% over 12 months in June, though the pace of wage gains is slowing.
While the latest jobs data still shows a robust labor market, it is softening from its status as one of the strongest labor markets in history.
An unemployment rate between 4%-5% is considered “full employment,” which is when a country’s available labor is being used in the most efficient way.
Full employment does not mean zero unemployment. Economists believe there needs to be some level of unemployment to minimize inflation and allow people to move between jobs, pursue education or improve job skills. The idea of full employment is that people looking for full-time work should be able to find it, although it might not be their preferred job.
But initial unemployment claims are trending up and the number of people who are unemployed for more than half a year is also climbing. More than a fifth of the unemployed fall under that category, while the median amount of time people are unemployed is nearly 10 weeks. One year ago, it was 6.4 weeks.
How will banks hold up against stress test that mimics 2008 financial crisis?
Doctors use stress tests to find out how well one’s heart works when pumping harder than normal. The Federal Reserve does the same for banks and this year’s health results will be released Wednesday, June 26, after markets close.
After the 2008 financial crisis, the Fed determined it was a good idea to test how banks would hold up in the face of a severe global recession. Now, the Fed runs these stress tests annually on the nation’s biggest banks.
In this year’s fictional scenario, the unemployment rate peaks at 10%, which is what it peaked at during the Great Recession. Housing prices fall 36% and commercial real estate prices tank 40%. The largest banks are also subject to hypothetical global market shocks. In all, the Fed stress-tested 32 banks this year.
Straight Arrow News interviewed former Fed adviser and founder and CEO of QI Research, Danielle DiMartino Booth, ahead of the stress test results.
The following has been edited for length and clarity. You can watch the interview in the video at the top of this page.
Simone Del Rosario: Why should the average American care about how banks perform on these tests?
Danielle DiMartino Booth: I think what’s critical is to not have too short of a memory. I realized that 2008, 2009, at this point we’re talking almost 20 years ago. But it was very disruptive to the U.S. economy when the banks in the country were lining up like dominoes, one after the other, and effectively failing and requiring bailouts of some semblance. It was extremely disruptive to the economy.
Credit to households and businesses was abruptly cut off. That is going to be a huge impairment whether you’re running a business or if you’re trying to buy a car. We’ve seen that a hacking exercise that really run amok with the nation’s automobile dealerships was enough to kind of bring auto to its knees.
A similar set of circumstances can certainly unfold if banks end up being weaker than what we think they are and lending comes to a halt.
Simone Del Rosario: How do you think banks are going to fare when we get the results on Wednesday?
Danielle DiMartino Booth: We really are talking about the nation’s 32 largest banks. And if you could carve out the largest four banks, they have been very aggressive in recognizing losses and actually going so far as to push through charge-offs for some of their more problematic commercial real estate loans. I think that that is going to leave the very biggest U.S. banks in a good position to pass these stress tests.
When it comes to some of the mid-sized banks, I would say that’s where things might get a little bit more treacherous because some of your smaller banks that are still, nonetheless, multi-billion-dollars-in-assets banks, some of them haven’t really had the wherewithal, the ability to be that aggressive with their write-offs. So we’re kind of in a wait-and-see mode there. And we’ll see what those stress tests look like for them.
Overall though, one of my greater concerns is credit cards. I think banks have been a little bit more aggressive, surprising me, as the U.S. consumer has weakened. So I’ll be interested to see how their credit card loan books fare in the aftermath of these stress tests.
Simone Del Rosario: What are you concerned about when it comes to credit cards?
Danielle DiMartino Booth: Banks continue to grow their credit card loan books long after they had really clamped down and stopped growing their automobile loan books. And if you think about it, they walk hand in hand. If somebody is going to have trouble paying on their car loan, in many cases, they’re also going to have trouble making good on their other obligations that are in the form of debt.
And yet banks continue to increase the size of their loan books as if this fairly new phenomena of “buy now, pay later” was not running in the background and racking up about a third of whatever we were seeing increases in credit card debt on a per month basis. Buy now pay later was increasing by about a third of that growth rate, yet it’s not reflected on bank balance sheets. It’s not reported to credit agencies.
And that was really what surprised me with banks becoming as aggressive as they have their first quarter bank call sheets. It looks like they finally may have taken a step back, a little bit more risk averse on that front. I’ll be anxious to see what the Fed has to say about their credit cards.
Simone Del Rosario: Banks have gotten a lot better at passing these stress tests. Do you think there’s a chance they are too backward-looking? Let’s hope we don’t repeat the mistakes that led to the 2008 financial crisis, but are we accounting enough for future risks that are more indicative of the time that we’re living in?
Danielle DiMartino Booth: Things indeed are different. I just mentioned buy now, pay later, which certainly was not around 10, 15 years ago. And you’re right, driving through the rearview mirror can be very problematic, fighting the last war.
It remains to be seen where the true stress lies in the system. The fault lines have decidedly moved. We are a much more global and interconnected banking system than we were.
Prior to the pandemic, we heard a lot every day about de-globalization. But in the aftermath of the great financial crisis, there were a lot more entities, countries, banks and firms internationally that took out debt that was dominated in dollars. And that’s just one example that I can think up of where we might not know where the stresses lie.
We just had a very large Japanese bank declare that it was going to be sustaining very large losses based on its holdings of U.S. Treasuries.
Simone Del Rosario: Separate from these stress tests, large banks also undergo living will exercises, which test how quickly the largest banks could unwind Wall Street contracts in the event of a catastrophe. Four of the eight largest banks fell short this time around. What does that tell us?
Danielle DiMartino Booth: That tells you that bankers are really being bankers. It is a bank’s business model to have as much of their capital deployed, working for the bank, making loans, growing the asset base. That is what banks do.
It does not necessarily surprise me to hear that they have failed in writing their own wills. They have shareholders that they have to look out for, and you would normally want to see something of the nature of a will be more of a back and forth, something that is apt to be negotiated after the fact until regulators are comfortable that banks are where they need to be.
But does it surprise me that banks have not been aggressive enough? Absolutely not.
Confidence in economy takes another hit. Here’s what’s behind the bad vibes.
Americans’ confidence in the economy is wavering. After three consecutive months of growing consumer confidence, The Conference Board’s index took a hit in February.
Economists all over the map continue to point out that the U.S. economy is very strong right now. They can’t quite put a finger on why many Americans don’t feel the same way.
Terms like “vibecession” and the “silent recession” are making the rounds, where people report feeling like they’re living in a downturn even though the data points to an upswing. While price hikes are slowing, this latest consumer confidence survey shows people are currently worried about the job market and the political environment.
There are main economic indicators people see reports on every month, like the upcoming inflation report or the monthly jobs report. But to better understand the bad vibes around this economy, some study lesser-known data points that paint a more timely picture.
In an interview with former Federal Reserve adviser Danielle DiMartino Booth, she highlights some of the tea leaves she reads that are showing cracks in the economy, particularly in the labor market and with consumer spending. DiMartino Booth is the CEO and chief strategist of QI Research.
“Watch what companies do, not what the government says that they’re doing, because there seems to be such a big disparity in between the two that I think a lot of Americans have picked up on,” DiMartino Booth said.
For her part, she said she’s tracking Worker Adjustment and Retraining Notifications (WARN), which stems from a law requiring larger companies to notify states of upcoming mass layoffs.
Because many large companies offer generous severance packages, she said these layoffs are slow to show up on initial jobless claims. But that doesn’t mean they aren’t happening.
“We are indeed seeing these layoffs at the highest levels that we’ve seen since 2009, which was when the U.S. economy was in a pretty deep recession,” DiMartino Booth said. “You really do have to follow what’s happening in real time these days in order to get a better feel for what’s happening in the job market, which right now we’re seeing at recessionary levels.”
DiMartino Booth is also looking at consumer packaged goods (CPG), which are items that people regularly buy and use that require replacement, like food, makeup and household products. McKinsey & Company said CPG volume declined 2% to 4% on average in 2023, which it characterized as dramatic.
“Despite a relatively strong economy and low unemployment, consumers are buying fewer items – and spending more to do so,” McKinsey said.
“When you see good news out of Walmart, listen closely to what management is saying,” DiMartino Booth said. “Walmart is cannibalizing the sales of other retailers.”
Walmart continues to see customer boosts as more affluent people “trade down” to Walmart prices.
In a Forbes survey at the end of 2023, less than a third of respondents said their income exceeds expenses enough to live comfortably. Forty-one percent reported living paycheck to paycheck, while 29% said they don’t make enough to cover standard expenses.
