Yellen says U.S. economy remains solid, on path to ‘soft landing’ with no meaningful layoffs

 

Treasury Secretary Janet Yellen sought to reassure the public on Saturday that the U.S. economy remains strong, despite a string of weak job reports that have rattled investors and weighed on the stock market.

“We’re seeing less frenzy in terms of hiring and job openings, but we’re not seeing meaningful layoffs,” Yellen said at the Texas Tribune Festival in Austin. “I’m attentive to downside risk now on the employment side, but what I think we’re seeing, and hope we will continue to see, is a good, solid economy.”

Yellen said job growth has slowed compared to the “hiring frenzy” when the U.S. reopened after the Covid-19 pandemic, but the economy is “deep into a recovery” and “basically operating at full employment.”

The treasury secretary’s comments come a day after the Bureau of Labor Statistics reported another month of cooler-than-expected jobs data.

Nonfarm payrolls, a measure of U.S. job creation, increased by 142,000 in August, lower than the Dow Jones forecast of 161,000. The miss renewed worries about a slowing labor market, with the S&P 500 falling Friday to finish out the worst week since March 2023.

The unemployment rate, however, edged lower to 4.2% and job growth in August was higher than in July. The stock market sold off steeply early last month after the weak July report touched off renewed fears of a recession in the U.S.

Yellen on Saturday tried to calm jitters about the state of the economy: “I don’t see red lights flashing.”

The jobs data has raised worries about whether the Federal Reserve can clinch a so-called “soft landing,” raising interest rates to bring inflation under control and then executing cuts before the economy enters a recession. The Fed is widely expected to lower interest rates this month.

Yellen said the U.S. is on that path: “It really has been amazing to be able to get inflation down as meaningfully as we have. This is what most people would call the soft landing,” she said.

 Uncertainty over the U.S. economy's health is rippling through markets, adding fuel to an already volatile period that has investors grappling with a shift in Federal Reserve policy, a tight U.S. election, and worries over stretched valuations.

U.S. stocks tumbled on Friday after closely watched jobs data showed labor market momentum slowing more than expected, suggesting a narrower path for the U.S. to achieve a soft landing, in which the Fed is able to cool inflation without badly damaging economic growth.

The Fed is expected to cut interest rates at its Sept. 17-18 meeting, but the data revived fears that months of elevated borrowing costs have already started to pressure the economy. That is a potentially unwelcome development for investors after prospects for rate cuts against a background of resilient growth helped drive the S&P 500 (.SP, opens a new tab to record highs this year.

"The data shows that we remain on the soft-landing path, but clearly there's more downside risks to which the markets are going to be sensitive," said Angelo Kourkafas, senior investment strategist at Edward Jones. "The expectation for elevated volatility is a realistic one."

Evidence of ebbing risk appetite showed up across markets. The S&P 500 dropped 1.7% on Friday and has lost nearly 4.3% in the past week, its worst weekly decline since March 2023. Nvidia (NVDA.O), opens new tab, the poster child of this year's artificial intelligence excitement, was down over 4% and stood near its lowest level in about a month, falling along with other high-flying technology names.

Meanwhile, the Cboe Market Volatility index (.VIX), opens new tab, also called Wall Street's "fear gauge," hit its highest level in nearly a month on Friday.

"There's concern that the Fed is not going to be reacting quick enough or more forcefully enough to help prevent something more sinister," said Keith Lerner, co-chief investment officer, Truist Advisory Services.

Several factors threaten to compound the market's uncertainty. Futures bets on Friday showed investors pricing in a nearly 70% chance of a 25 basis point reduction by the Fed, and 30% chance of a 50 bp cut. For many, however, the issue remains far from settled.

"Markets have had to grapple with - just as the Fed is doing - whether the August payroll data reflects a labor market normalizing towards pre-COVID levels or whether it's indicative of an economy losing dangerous momentum," Quincy Krosby, chief global strategist for LPL Financial, said in written commentary.

Others took a dimmer view. Citi analysts said the report warranted a 50 basis point cut later this month.

"The takeaway from the range of labor market data is clear – the job market is cooling in a classic pattern that precedes recession," analysts at Citi wrote.

Inflation data next week could shed further light on the strength of the economy and help solidify bets on how much the Fed might cut rates.

Valuation concerns are also reemerging. The S&P 500, which is up over 13% this year, is trading at a price-to-earnings ratio of nearly 21 times expected forward 12-month earnings estimates as of Thursday, well above its historical average of 15.7, according to LSEG Datastream.

Despite a recent swoon, the S&P 500 technology sector (.SPLRCT), opens a new tab - by far the biggest group in the index - is trading at over 28 times expected earnings, compared to its long-term average of 21.2.

"We've come a long way in a relatively short period and I think you're starting to see some businesses do the math on AI and ask whether it's really worth the cost, which will weigh on the big tech stocks," said Mark Travis, a portfolio manager at Intrepid Capital Management.

Investors are also closely watching a tight U.S. presidential election which is starting to head into the home stretch. The race between Democrat Kamala Harris and Republican Donald Trump could draw more investor focus on Tuesday, when the two candidates debate for the first time ahead of the Nov. 5 vote.

So far, the market gyrations have bolstered September's reputation as a tough time for investors. The S&P 500 has fallen an average of nearly 0.8% in September since 1945, making it the worst month for stocks, CFRA data showed. The index is already down 4% since the month began.

"Investors are saying let's hope we can have a soft landing," said Burns McKinney, senior portfolio manager at NFJ Investment Group. "It still feels like it's fairly likely, but with each weaker job number it's becoming less and less the base case."