The unemployment rate has increased, which could potentially alleviate fears of a recession. This is significant because the disappointing jobs report led to a brief sell-off in global financial markets. However, unique factors might be exaggerating the perceived weakness in the labor market.
Federal Reserve Governor Michelle Bowman mentioned in a speech over the weekend that the recent rise in unemployment might be overstating how much the labor market is cooling down. She noted that the rise in unemployment this year is mainly due to slower hiring rates, as people newly entering the labor force take longer to find jobs while layoffs remain relatively low.
The unemployment rate has increased by 0.9 percentage points from its low of 3.4% last spring, including a 0.2 percentage point rise last month, which triggered the Sahm Rule—a potential recession indicator. Yet, there are a few aspects to consider in this increase. Even though 352,000 more Americans were unemployed last month, about 70% of those were temporary layoffs, suggesting many could soon return to work. Economists point to Hurricane Beryl, which impacted Texas during the worker survey week, as a factor contributing to these temporary layoffs. Approximately 430,000 people reported not working due to bad weather last month, much higher than the historical average for July.
The government reported that the hurricane did not noticeably affect the July jobs numbers, but some private sector economists disagree, noting Beryl's impact. Additionally, more people entering the labor force can inflate the unemployment rate. While about 67,000 people found employment last month, a much larger number (around 420,000) entered the workforce without finding jobs.
According to Satyam Panday, an economist at S&P Global Ratings, the increase in the unemployment rate mainly stems from labor force expansion rather than job losses, a key difference from past recession cycles. As of June, new entrants to the labor force accounted for 0.3 percentage points of the jobless rate increase since last April.
On the other hand, Goldman Sachs is cautious about whether temporarily laid-off workers will soon be reported as employed. Their economists highlighted that the largest increases in temporary layoffs occurred in the leisure and hospitality sectors and construction industries in states like California, which were not affected by bad weather. This makes them less confident about a quick reversal in the unemployment rate increase from July. However, they noted that temporary layoffs are a tricky indicator, and other signs suggest layoffs are still low.