Weaker labor market stokes fears of a downturn, spurs market sell-off
Employers added 114,000 jobs in July and the unemployment rate spiked to 4.3%, reflecting a weaker-than-expected labor market that is stoking fears that interest rates have been too high for too long.
With the unemployment rate at its highest since coming out of the pandemic downturn in 2021, economists, banking analysts and investors warned that recession signals are flashing.
Financial markets on Friday reflected worries that the Federal Reserve missed an opportunity to save the economy from a downfall by holding out for a September rate cut, reversing recent optimism about the strength of the economy. All three of the major stock indexes opened down significantly, with the S&P 500 falling by 1.2% upon opening Friday and the tech-heavy Nasdaq composite index down by around 3%.
“It’s a pretty awful report on a lot of levels,” said Joseph LaVorgna, a former Trump White House economist who is at SMBC Nikko Securities, noting the “broad hiring trends clearly downshifting” and the “even more troubling” rise in unemployment.
Wage growth also slowed considerably in July, increasing by 0.2% from June and by 3.6% over the past year, the slowest growth since May 2021.
There were other signs of cooling in the report, including the average length of the private sector workweek falling to 34.2 hours, matching the lowest level in more than a decade, and furloughs spiking by 30%, a nearly three-year high.
President Joe Biden said the employment report shows jobs are growing “more gradually at a time when inflation has declined significantly,” in a statement. “There’s still more to do, but we’re making progress growing the economy from the middle out and the bottom up,” he added.
Some Republicans pounced on the sour numbers, sharing a clip of an economist calling the July jobs report “bearish.”
“I’m beginning to smell a recession coming into view,” John Lonski, a financial markets economist, said on Fox Business on Friday morning in a clip later shared on X by the National Republican Congressional Committee.
The weaker-than-expected jobs report put immediate attention on the Federal Reserve and its ongoing fight to slow the economy.
Over the past few years, the Fed sprinted to hoist borrowing costs and to catch up to and curb high inflation. Central bankers have said they are waiting to lower rates until they are certain inflation is coming under control. But with inflation easing closer to normal levels, officials increasingly acknowledge that there are risks – particularly for the job market – to keeping rates too high for too long.
“Wait too long or don’t go fast enough, and you put at risk the recovery,” Fed Chair Jerome H. Powell said this week, after the Fed left rates unchanged at their highest level in 23 years. “And so we have to balance those two things. … It’s a rough balance.”
Yet some experts say the Fed is falling dangerously behind again, with the latest jobs report confirming that fear.
“The Fed isn’t supposed to cut rates in reaction to cracks in the labor market. It’s supposed to cut rates to anticipate cracks in the labor market,” said Bilal Baydoun, director of policy and research at the left-leaning Groundwork Collaborative. “We fear that the Fed is so behind the eight ball here that they made a mistake not cutting rates in July.”
If the signs pile up that the economy is weakening, the Fed could decide to cut rates more often, or at a larger scale than expected, for example by a full half of a percentage point, although Powell said Wednesday that wasn’t being discussed. But that could change.
“The jobs market went from tapping the brakes to leaving skid marks,” said Robert Frick, an economist at Navy Federal Credit Union, in an analyst note. “This should lock in not only a September rate cut, but perhaps a deeper cut in September and accelerate the schedule of cuts this year and next.”
In the jobs report, employers added the most jobs in construction, transportation and warehousing, government, and health care – which led gains, buoying the labor market because of high demand from an aging population.
Construction added 25,000 jobs in July, reflecting remarkable resilience in the interest-rate-sensitive sector, especially among specialty trade contractors. Transportation and warehouse added 14,000 jobs, after hitting a low in January – a recalibration after a massive expansion during the e-commerce boom of the early pandemic days. Most of July’s job gains were in delivery and storage.
Nearly all other major private industries barely grew last month, and some shrank. Excluding health care and social assistance, private employers added a meager 33,000 jobs in July.
The information sector, which includes tech jobs, lost 20,000 jobs in July, as higher interest rates have brought hiring to a halt. Manufacturing, financial services, wholesale trade, professional and business services, and leisure and hospitality added little or no jobs in July.
There are other signs the labor market is softer: Employers are hiring at the slowest pace in a decade, excluding the pandemic shutdown; job openings have slowed considerably, though they remain higher than before the pandemic; and workers are not switching jobs as much.
Job growth in leisure and hospitality, which fueled the 2021-to-2023 labor market boom as the pandemic began easing, has sputtered, adding 23,000 jobs in July. Restaurant owners have been grappling with the higher costs of labor and borrowing required to expand.
That’s hurting Black, Hispanic and young workers, who are disproportionately represented in some lower-wage sectors, contributing to a rise in their unemployment rates over the past year, said Julia Pollak, chief economist at ZipRecruiter.
These conditions have made it more difficult for workers across the private sector to find jobs, contributing to their gloomy outlook about the economy.
Joblessness rose in July for white and Hispanic workers, as well as for all adult men.
Jordan Arias, 29, a mother of two in Morris County, New Jersey, lost her job in January 2023. She has struggled to find work in the nonprofit sector, where she previously worked, applying to at least 100 jobs without luck, she said. She’s focusing her job search within the nonprofit sector, but competing with applicants with master’s degrees while she has only a bachelor’s has hurt her prospects, Arias said, calling the job hunt “terrible” and “grueling.”
“I’ve had trouble making ends meet,” Arias said. “I’ve really depended on my family. My house is running bare-bones. We have WiFi, and that’s it. For my kids, they usually have robust summers at water parks and the beach. I feel bad for them, because we haven’t done any of that.”
Some economists stress that the overall labor market remains healthy, with current job gains strong enough to sustain population growth.
“The labor market is still in a good spot right now, but all indications are that it’s unlikely to stick around here,” said Nick Bunker, economic research director at the jobs site Indeed.
Acting labor secretary Julie Su pushed back against the idea that the economy is headed toward a downturn, telling The Washington Post, “The overall signs are inconsistent with recession.”
The S&P 500 plunged more than 2% Friday morning before regaining some ground.
The tech-heavy Nasdaq index had fallen 2.43% in closing Friday, dragged downward by a spate of bad earnings news from some major tech companies.
Amazon’s sales and revenue grew slower than expected, pushing the stock down nearly 9% Friday.
Shares of chipmaker Intel lost 26% after it announced a quarterly loss and aggressive cost-cutting measures.
CFRA chief investment strategist Sam Stovall said the market experienced a one-two punch of bad earnings and worrisome economic data.
Not since the dot-com bubble has the tech sector played this much of a role in the S&P 500, Stovall said, suggesting the year’s AI-driven rally might have set the stage for a pullback.
“Basically, the market got overly exuberant, in my opinion, and made itself vulnerable to a decline based on whatever data there might be,” Stovall said.