Job Growth Was Soft in July, Partly Due to Hurricane Beryl;
Fed Set to Start Cutting Rates in September
The July jobs report was considerably weaker than expected. Employers added just 114,000 nonfarm payroll jobs, the unemployment rate rose to 4.3%, and average hourly earnings growth slowed to 3.6%. That gave July the highest unemployment rate and slowest wage growth since 2021. Other labor market data released after the jobs report emphasize how the job market is softening. The Bureau of Labor Statistics’ annual preliminary benchmark revision revised down the level of employment in March 2024 by 818,000, implying that job growth in the 12 months through July was just 164,000, less than shown in the monthly report. And the mid-August release of state-level data on employment and unemployment showed that July’s weakness wasn’t just in Texas, where Hurricane Beryl was a huge disruption, but spread across a number of states on the East Coast, Midwest, and High Plains.
Importantly, the unemployment rate rose enough in July to trigger the “Sahm Rule.” This is former Fed economist Claudia Sahm’s observation that, in past periods when the unemployment rate’s three-month moving average rose by half a percent or more relative to its low in the prior twelve months, the economy has already been in recession. However, temporary factors likely contributed to higher unemployment in July, like the impact of Hurricane Beryl and more jobseekers entering the labor market after the last few years’ increase of immigration. Hopefully that means mid-2024 can be an exception to the Sahm Rule.
Another reason to think the Sahm Rule is a false alarm is that economic activity indicators point to continued growth in the third quarter. Retail sales rose solidly in July, helped by higher auto sales after the CDK hack. And in early August, initial jobless claims stabilized, hotel occupancy rates held steady, and a widely-followed survey of service-providing businesses indicated continued solid growth.
Even so, the triggering of the Sahm Rule makes the Fed likely to reduce interest rates faster over the next few quarters than the Fed’s policymakers indicated in their June dot plot, which showed most of them thought only one or two quarter-percentage-point rate cuts would be appropriate before year-end. Comerica’s August forecast anticipates for the Fed to cut the federal funds target by a quarter percentage point at each of the three remaining decisions scheduled this year (September, November, and December), up from two such cuts in our July forecast. The forecast anticipates another 1.25 percentage points of rate cuts in 2025. Lower interest rates will support a recovery of credit-sensitive economic activity this fall and winter, like existing home sales. That should help the unemployment rate stabilize and extend the economic expansion into 2025.
For a PDF version of this publication, click here: August 2024 U.S. Economic Outlook
