While the stock market’s downward spiral continues to dominate headlines, analysts say the latest job figures are equally concerning. The July jobs report, released by the Bureau of Labor Statistics (BLS), has left many questioning the strength of the US economy. Under sustained pressure from high interest rates and persistent inflation, the “sizzling” labor market—as mainstream outlets have described it for months—seems to be cooling off.
“Temperatures might be hot around the country, but there’s no summer heatwave for the job market,” said Becky Frankiewicz, president of the ManpowerGroup employment agency. Instead of fireworks, July’s jobs report delivered a meager 114,000 new jobs, far below the expected 185,000. Adding to concerns, job growth for May and June was also revised downwards by a total of 27,000 jobs—a trend that has marked much of the current administration’s tenure.
The unexpected slowdown in job growth has sparked strong reactions from politicians and economists, many of whom blame the Fed’s inaction amid emerging cracks in the economy. Critics argue that the Fed’s decision to raise interest rates too quickly and aggressively is now taking its toll on the labor market. However, others believe that the problem runs deeper than monetary policy. With the Fed backed into a corner, and the economy seemingly on the brink of a downturn, many are wondering if the US is facing a larger structural problem that can’t be solved by simple rate adjustments.
A Closer Look into July’s Job Report
While employment numbers have been a bright spot in an otherwise turbulent economy this year, the latest jobs report doesn’t do much to ease concerns about the future. The 114,000 non-farm payroll jobs added in July was the second-lowest monthly gain since December 2020 and just shy of half of the 206,000 jobs added in June. In addition to the lower-than-expected job growth, the unemployment rate also rose to 4.3%, the highest since October 2021 while jobless claims hit a two-year high in July. As Preston Caldwell, Morningstar’s chief U.S. economist, aptly puts it, “Once the unemployment rate gets moving upward, it’s very likely to continue rising. Rising unemployment is part of a vicious process of economic contraction.” Meanwhile, the labor force participation rate remained relatively unchanged at 62.7%, indicating that job seekers are still hesitant to enter the workforce.
Looking across industries, the biggest job losses were seen in the information and financial sectors. While government employment saw a 17,000 uptick, information and financial activities lost a combined 24,000 jobs. This drop in information sector employment is particularly concerning given the rapid growth of tech companies and their impact on the overall economy. Frankiewicz sums it up well, “With across-the-board cooling, we have lost most of the gains we saw from the first quarter of the year.” At the same time, the number of multiple job holders continues to climb, and with job growth slowing and wages remaining stagnant, it’s clear that many workers are struggling to make ends meet.
A History of Downward Revisions
The July Jobs Report is just the latest in a long string of reports that have been met with skepticism and disappointment. While the BLS’s monthly job numbers are typically seen as the gold standard for measuring employment, the reality is that these numbers are by no means perfect. Figures are often revised multiple times before being finalized and the inputs for the models used to estimate employment numbers can be rife with error.
Take 2023, for example. Month after month, preliminary job figures were revised downwards, creating an illusion of labor market strength that simply did not exist. While the Biden administration boasted of record job growth, the underlying trends told a different story. In total, nearly 800,000 jobs were revised downwards throughout the year, raising questions about the accuracy of the initial reports and casting doubt on their true impact. Put another way, almost one in every four jobs added to the economy in 2023 did not actually exist. The much-touted monthly job gains were less a reflection of real economic growth and more a result of statistical noise and inflated numbers.
So far, 2024 has proven to be no different. January alone saw a staggering cut of 124,000 from its initial 353,000 jobs reported. And while this may be seen as a fluke, the truth is that downward revisions have become commonplace in the BLS’s reports. Payrolls have been revised downwards nearly every month since the start of 2024, with hundreds of thousands of jobs disappearing from the initial reports. April’s payroll was revised downwards by 57,000, while May’s saw a cut of 54,000 jobs. Kathy Jones, chief fixed-income strategist at Charles Schwab, observed, “The downward revisions to the previous two months combined with the rise in the unemployment rate are the significant data points. Wage growth also is slowing. All of that adds up to a slower trend.”
The cumulative revisions across these months not only challenge the notion of a strong labor market but also reflect deeper issues affecting real people. When Americans look at the job market, they see a mirage crafted by imperfect data and overly optimistic assumptions. The reality hits harder when revisions come to light, as the rosy picture painted by the initial reports is shattered.
Given this history, what can Americans expect moving forward? If the past is prologue, then the answer is more of the same. The job market could continue to be plagued by discrepancies, with monthly gains that appear strong on the surface but are later tempered by downward revisions. A cyclical dance of inflated numbers and statistical noise that does little to reflect the true health and well-being of the American workforce.
A Sign of a Weakening Economy?
With downward revisions becoming a regular occurrence, it begs the question—is the US economy weakening? Taken alone, slowing job growth and rising unemployment may not be enough to signal a downturn. However, when combined with other data such as declining consumer spending and weakening business confidence, experts say it could be a sign of an economy on the decline.
“The July jobs report is being viewed as a recession warning, and the markets are responding accordingly,” noted Bill Adams, chief economist at Comerica Bank. The sharp decline in job creation along with the recent market volatility and yield curve inversion paints a concerning picture of the current state of the economy. And as we have seen in recent months, job figures are likely to be revised downwards in the coming months—adding to the already gloomy outlook.
Overlaying these concerns is the Sahm Rule, a recession indicator developed by economist Claudia Sahm. According to Sahm, a recession is likely when the three-month average unemployment rate increases by at least 0.5 percentage points above its lowest point from the previous year. The thought is that a weakening labor market could lead to a slowdown in consumer spending, which accounts for roughly 70% of the US economy.
Historically, the rule has proven to be a reliable indicator of recession. In all of the past 12 recessions since 1947, the Sahm rule would have been triggered, with only two false positives occurring in 1959 and 2003. Over the last three months, the average unemployment rate reached 4.13%, marking an increase of 0.63 percentage points from the 3.5% recorded in July 2023. With spending growth slowing from above 3% in the second half of 2023 to about 2% today, it appears that consumer spending may already be showing signs of weakening.
Impact on American Workers
The constant downward revisions and discrepancies in job numbers have implications beyond just political spin. The BLS’s job figures serve as a cornerstone for federal and state economic policy-making. Agencies rely heavily on this data to inform fiscal and monetary policies, while businesses use it to make hiring or investment decisions. When job figures are inflated, it often leads to a false sense of security. Businesses may increase hiring or ramp up production based on the perception of a strong economy with low unemployment rates. Meanwhile, government agencies may be more likely to raise interest rates or reduce federal spending, leading to a tightening of credit and an overall slowdown in economic growth. Both of these reactions can have a direct impact on American workers and their livelihoods.
Job security, once a hallmark of the American dream, now seems to be a fading notion for many workers. The fear of job loss has become a constant companion for millions of Americans, adding to the stress and anxiety of daily life. And for those who do find themselves unemployed, the road to reemployment can be long and arduous. With a growing number of companies automating or outsourcing jobs, the traditional safety nets of unemployment benefits and job retraining programs are often not enough to support workers in transition. Given the unemployment rate’s correlation with economic downturns, it’s not just the fear of job loss that plagues American workers, but also the fear of a potential recession. If the Sahm rule’s signals are accurate, the current economic climate may be a warning sign for American workers to prepare for potential rough waters ahead.
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