(Reuters Breakingviews) - Equity investors around the globe seem convinced that the U.S. labor market is cracking. A broad stock sell-off on Monday follows on the heels of disappointing employment figures for July, reigniting recession fears. That gloomy view ignores the peculiar dynamics of the U.S. workforce. Until more CEOs follow Intel (INTC.O)
boss Pat Gelsinger down the route of mass layoffs, the world’s largest economy will slow down but not contract.
Granted, Friday’s jobs data showed a rise in the unemployment rate to 4.3% from 4.1% in June. But employers still added 114,000 jobs last month, below what economists had expected but still consistent with a healthy labor market. The share of prime working-age people with a job matches the highest in over two decades, at 80.9%. And much of the uptick in unemployment is because more workers, both native-born and immigrant, are joining the workforce.
Yet these shifts in the labor market have triggered the “Sahm Rule,” which posits that a half-percentage-point rise in the unemployment rate over three months indicates a recession has begun. The rationale is that rising joblessness hits consumers’ spending power, setting off a vicious cycle of job losses and economic contraction. But even Claudia Sahm, the former Federal Reserve economist behind the rule, does not believe that recession is necessarily imminent, though she does think the central bank should have begun cutting rates in July rather than waiting until September.
Moreover, summer weather, particularly Hurricane Beryl and the power outages it caused in Texas, probably affected the jobs number. The San Francisco Fed estimated that, adjusting for those effects, job growth should have come in between 130,000 and 150,000. That's in line with the recent norm, according to Goldman Sachs economists, suggesting that an economic “soft landing”- where inflation glides back down without causing a recession – is still achievable.
Investors seem to disagree, judging by the sharp moves in stock markets, amplified by other factors such as an unwinding of leveraged bets on the yen, increasing pressure on Fed Chair Jerome Powell to cut rates by 50 basis points in September – and keep going after that.
But one jobs report that still shows payroll growth in line with recent trends is hardly evidence of an upcoming recession. If job cuts accelerate and net payroll growth goes negative, with layoffs like Intel’s announced 17,500 slashed positions, investors will be right to worry about an economic contraction. But for now, traders would be wise to heed Powell’s repeated mantra to look at the totality of the data, and not faint over a single indicator.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
CONTEXT NEWS
Stock markets across the globe fell sharply on Aug. 5. The sell-off comes after the U.S. Bureau of Labor Statistics on Aug. 2 reported that employment gains were weaker than expected in July. Businesses outside the agricultural sector added 114,000 jobs, below the 175,000-job increase expected by economists polled by Reuters, while the unemployment rate rose to 4.3% from 4.1% in June.
On Aug. 1, chipmaker Intel said it would cut more than 15% of its workforce, or 17,500 people, to cut costs.