Author: Kamiu, Researcher at 4Alpha Research
Opinions in a nutshell
The market overreaction reflects Wall Street's consistent mentality of making a bigger reaction to the failure of interest rate cuts. The Federal Reserve has its own tricks.
The increase in the unemployment rate in July was due to temporary accidental factors such as hurricanes
The unemployment rate and new employment in July were significantly worse than expected due to structural reasons, but this may not be a completely bad thing for the US economy: the return of immigrants and workers who have withdrawn from the labor force to the market will help to curb inflation in the long run
Under this sentiment, the spiral plunge caused by the stampede of long positions cannot fully explain that the US non-farm employment in July directly points to a hard landing and a cliff-like recession.
The Federal Reserve may not think that the United States is already facing a huge risk of recession. It is generally believed that the Federal Reserve FOMC voting committee can see some economic data for the month before voting on the resolution, although these data are usually limited. According to the minutes of the Federal Reserve meeting, when discussing the outlook for monetary policy, officials will emphasize the need to make future decisions based on upcoming data, changing economic prospects and risk balance. This shows that they will rely on the latest information when making decisions, including the non-farm data that will be released soon.
Powell did not completely turn to rate cuts as expected in the July FOMC interview, but retained a hawkish stance. This shows that after seeing the dismal non-farm data in July, he still chose to retain the option of continuing to use high interest rates to curb inflation, rather than an emergency rate hike in July to exit the high interest rate framework all at once. It also shows that Powell is not overly worried about the US recession.
Modern monetary policy theory emphasizes the forward-looking and guiding role of monetary policy for market expectations. Powell and the Federal Reserve he leads may have learned from the lesson of the excessive and uncontrollable opening of the floodgates in 2020. If the interest rate is cut sharply as expected by the market, it may lead to the self-reinforcement of market expectations, a sharp drop in Treasury yields and the resurgence of inflation. Powell and the Federal Reserve obviously do not want to waste years of anti-inflation efforts overnight. He himself clearly stated that "the risks of acting too early and waiting too long must be weighed", indicating that while he is ready to cut interest rates, he also holds concerns that a premature rate cut may lead to the failure of forward guidance. Goolsbee, a voting member of the FOMC next year, a well-known dovish official, and the president of the Chicago Fed, even said that it is unwise to overreact to the data of a single month and recognized the Fed's decision not to cut interest rates urgently.
Second, weak data in a single month does not necessarily point to recession risk
The current economic operation status of the United States can only be described as "slowing growth", and it is difficult to say that it is a deep recession. The definition of the US economic recession period has always been completed by the National Bureau of Economic Research (NBER), which mainly defines the recession period through indicators such as personal real income, non-agricultural enterprise and household survey employment, consumer expenditure, and industrial output.
NBER did not actually publish its specific judgment criteria, but from the perspective of income and consumption, personal consumption and personal disposable income in June did not change much compared with the beginning of the year. The year-on-year growth rate of personal disposable income narrowed from 4.0% to 3.6%, and personal consumption expenditure increased from 1.9% to 2.6% year-on-year. At the same time, production output also improved. Only employment fell sharply, and the influence of accidental factors cannot be ruled out. Therefore, the US economy should still have a buffer distance from a real recession, which is enough to support the FOMC not to cut interest rates in July.
At the same time, other data released recently may show that the US economic potential and growth resilience still exist. The U.S. ISM non-manufacturing index for July, released on August 4 (Sunday), and the initial jobless claims data for the week of August 3, released on August 8 (Thursday), boosted market sentiment. The ISM non-manufacturing index for July was 51.4, exceeding the expected value of 51 and the previous value of 48.8, which to some extent alleviated the market's pressure due to the ISM The extreme panic and stampede caused by the PMI and unemployment data; the number of first-time unemployment applications for the week of August 3 was 233,000, significantly lower than the expected 240,000 and the previous value of 249,000. The market's panic about the United States falling into a cliff-like economic recession has further weakened. These generally positive economic data show that the US economy is unlikely to slide to the bottom as quickly as the pessimistic market prices show.
Third, there are accidental factors in the decline of non-agricultural data in July
In the early morning of July 8, local time, Hurricane Beryl landed in Texas, the United States with the power of a Category 1 hurricane. According to records, this hurricane is the strongest hurricane of the same period since 1851, and it has also become the strongest hurricane in the world since 2024. Although Beryl began to weaken soon after landing in the United States, its impact lasted for many days. In the Houston area, about 2.7 million households and businesses experienced power outages for several days. Even more than ten days after the hurricane landed, tens of thousands of residents and businesses in Texas still had no power supply restored.
The BLS non-farm report shows that in July this year, the number of non-agricultural employees in the United States who did not participate in labor due to bad weather was 436,000, which set a record for July and was more than 10 times the average level of July in each year since BLS began to collect this data in 1976. In addition, more than 1 million people could only work part-time due to weather reasons, which also set a record for the highest data in July in all previous years. In the sample survey, these informal jobs are likely to be missed. Although the BLS claims that "the hurricane has little impact on employment data", the economics community and the market generally believe that the BLS's statement is inconsistent with the facts. The great damage to the job market caused by the above-mentioned hurricanes obviously has a huge impact on the number of new jobs and the unemployment rate in the non-agricultural employment data.
Fourth, the influx of immigrants and the return of labor force constitute structural factors for the rise in unemployment
First, the influx of illegal immigrants after the epidemic has undoubtedly had an impact on the local labor market. These immigrants are usually willing to accept lower wages and working conditions, thereby competing with local workers in the low-skilled labor market. This additional supply and competition not only pushed up the unemployment rate, but also may have lowered the wage level in some industries, making those industries that rely on low-skilled labor face greater employment pressure.
Second, in the early days of the epidemic, many workers left the labor market due to sequelae of the new crown, health concerns, childcare responsibilities, company layoffs or reduced remote work opportunities. As vaccination rates increase and epidemic restrictions are relaxed, these workers are beginning to reassess their employment status and gradually return to the labor market. Although this trend is a positive sign of economic recovery, it also means that the number of job seekers available in the labor market has increased, which may lead to an increase in the unemployment rate in the short term.
The unemployment benefits and other fiscal support measures such as MMT provided by the US government during the epidemic have provided necessary financial assistance to the unemployed in the short term, but may also reduce their urgency to find a job. As these relief measures are gradually reduced, workers who originally relied on these benefits are forced to re-enter the labor market, which has also led to a rebound in the unemployment rate to a certain extent.
The outward shift of the above-mentioned labor supply curve is actually a signal of economic recovery, and it is expected to have a more obvious curbing effect on inflation, which can give the Federal Reserve more policy space for interest rate cuts.
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