The latest labor market data indicates troubling signs for the U.S. economy, as the July payrolls report revealed a disappointing increase of only 73,000 jobs, significantly below expectations. This bleak number follows on the heels of a large downward revision of June’s payrolls. The prior month’s report of 147,000 has been severely revised downward to a mere 14,000. The latest numbers indicate a major collapse of the U.S. labor market. Together, this shift brings up fundamental questions about the economy’s resilience.
In September, education and health services added the most new jobs. Steep losses were recorded in the professional and business services, government, information, and mining sectors. Job growth has clearly and dramatically slowed over the past two months. This gloomy reality has led to fears that the U.S. economy is just beginning to experience a jobs desert.
Impact on Federal Reserve Policy
Federal Reserve Chair Jerome Powell is feeling the heat. The central bank will now need to recalculate its course according to the new economic figures. Analysts were expecting a partial FOMC meeting to deliver about 1.3 interest rate cuts. With the collapse of the recent labor market developments, expectations have turned on a dime, and markets now predict two rate cuts.
The Fed’s decision-making process is further muddied by increasing bond yields across Europe that have recently flipped in the opposite direction. European bourses remained deep in the red. At the same time, U.S. Treasury yields are under pressure, with 10-year yields down 13 basis points and 2-year yields down 17 basis points. Underlying this drop in yields is increasing investor anxiety over the future course of the U.S. economy.
Currency Market Reactions
That payrolls data in particular has overshadowed a lot of other news, including this week’s update on tariff rates former President Donald Trump ordered imposed. This is why the U.S. dollar has failed in recent performance against the other G10 foreign exchange currencies. It is no longer the world’s best performing currency. Meanwhile, both the yen and euro have been stronger performers since the Non-Farm Payroll (NFP) report.
Market analysts recognize that this dramatic movement in currency dynamics is demonstrative of a more investor sentiment towards increasing economic calamity. Traders are recalibrating their risk appetite with the dollar trade reversing. They’re right to be concerned about anemic economic growth driven by dismal job creation.
Broader Economic Implications
The recently released labor market data comes as a huge wildcard to an economy already creating an extremely difficult picture. With sectors like education and health services booming, it’s easier to ignore the obvious suffering in other industries. Even more alarming is the professional and business services, government, and mining jobs declines. Business investment has been underperforming, which might have longer-term consequences on our potential economic growth.
None of this would matter if labor market conditions weren’t turning against workers. So economists are looking for signs of weakness, which could affect consumer confidence and therefore consumer spending. Should this trend continue, it could further complicate the Federal Reserve’s approach to monetary policy as they navigate between stimulating growth and controlling inflation.