Employment poised to cool in July

July 29, 2024

Non-farm payrolls are expected to rise by 185,000 in July, a slowdown from 240,000 in June. The public sector should continue to buoy gains with hiring at the state and local levels. However, there are signs that momentum is waning. Revenues at the state and local levels have fallen short of budgets this fiscal year, while COVID-era subsidies have lapsed.

The upside risk is in how the data are seasonally adjusted. Pre-pandemic, over 1.1 million workers would leave local education in the month of July, only to return with the start of the next school year. That means that any seasonal layoffs that are less than 1.1 million during the month of July will show up as a gain.

Private sector payrolls are expected to rise by 145,000, a slowdown from June. Hiring in healthcare and social services is expected to remain a driver of gains. Demand for healthcare has increased post-pandemic in nearly every major economy around the world as aging demographics, the legacy effects of COVID and a rise in hospitalizations across the board are buoying demand for healthcare. Elder and childcare facilities remain particularly understaffed.

Leisure and hospitality have faded a bit. Many vacant positions have finally been filled, while demand is cresting. Discounting has picked up, especially across fast-food chains, which is expected to crimp margins and slow the pace of hiring in food services. Hiring in the goods sector is expected to be subdued. A surge in vehicle inventories on dealer lots is expected to extend the usual downtime for retooling.

Average hourly earnings are expected to rise 0.3% in July, the same as June. That translates to a 3.7% pace from a year ago, the weakest since April 2021. Weekly hours worked are expected to remain subdued. Hurricane Beryl, which hit Texas, caused flooding, property damages and millions to lose power, is expected to exacerbate a slowdown in hours worked. It also likely boosted those out due to weather disruption.

The household survey is expected to show that the unemployment rate held at 4.1% but risks are to the upside. Much of the increase in unemployment has come from a rise in the number of people looking for work, although those who lose a job are having a tougher time replacing it. New college grads are seeing some of the largest increases in unemployment, a complete reversal of what we saw two years ago.

Separately, we will be looking for disruptions due to childcare, which have moved well above seasonal norms in recent years due to a shortage of affordable options. Low-wage women struggle most.

Triggering the “Sahm Rule?”

Separately, we are extremely close to triggering what is known as the Sahm Rule, or an early recession indicator in July. That occurs when the unemployment rate moves above 0.5% for three consecutive months in any twelve-month period. We came extremely close in June, with the Sahm Rule hitting 0.43%. That has prompted some panic about rate cuts. However, much of the rise in unemployment this year has been due to an influx of job seekers as opposed to a surge in layoffs.

Still the move up in the index, coupled with signs that the labor market continues to cool, should open the door to rate cuts in September. The Fed’s goal is to chill the economy, not send it into a deep freeze. The Fed cut rates in 1995, the only other time that it achieved what is known as a soft landing. It should be noted that the first cut after hiking rates aggressively in 1994 and early 1995 only occurred after payroll employment slipped into the red for two months. The data were later revised higher, which slowed the descent on rate cuts. The episode is worth remembering as it underscores how tough a soft landing is to achieve.