July jobs report miss puts September rate cuts in play

We just got the July jobs report and wow, it was a very negative report with a headline miss of estimates and major negative job revisions. Job growth came in at 73,000 and the unemployment rate stands at 4.2%.

What does this mean? As we’ve noted for a while, the labor market is getting softer, but it’s not breaking. What did the bond market do? There was a massive rally in the 10-year yield and we will see lower mortgage rates today. As I write this, the 10-year yield is currently at 4.26%.

This report will put more pressure on Federal Reserve Chair Jerome Powell, who made it clear that he was going to stay as restrictive as possible until he got more clarity on the trade war, but dismissed many people’s concerns that the labor market wasn’t as strong as he talked about. We saw massive negative revisions to this report, and the 3-month average job creation is now just 35,000.

I would say that if the Federal Reserve had this jobs report in hand two weeks ago, they would have cut rates in the last meeting. However, I am not entirely sure Powell would have given his blessing for a rate cut. This might put a 50% rate cut in play in September.

From BLS: “Total nonfarm payroll employment changed little in July (+73,000) and has shown little change since April, the U.S. Bureau of Labor Statistics (BLS) reported today. The unemployment rate, at 4.2 percent, also changed little in July. Employment continued to trend up in health care and social assistance. The federal government continued to lose jobs.“

Monthly job creation

This report shows that without government jobs to support the total report, the growth of private payrolls has significantly declined and has become narrower. The monthly negative revisions were the biggest I have seen ever outside of Covid: —253,000 jobs in May and June was the biggest revision since 1973, if we take COVID-19 out of the data pool.

Residential construction workers

Residential construction workers are very key to my economic cycle modeling work when we need to be mindful of recessionary data. In today’s report, we saw a decline in this labor. As I have often written, mortgage rates are too high for the builders to make housing construction grow, so rates falling today is a good first step to try to reverse the negative data we have seen.

Unemployment rate

Now, the unemployment rate is low historically, and the Fed believes that they’re at full employment with the labor force growth we have in America today. However, they also said they’re modestly restrictive and can act if the labor data gets weaker. Hello McFly, Hello!

Conclusion

Now the labor market isn’t breaking, of course, as the jobless claims data shows below.

But the Federal Reserve is simply playing with fire when they don’t need to with their modestly restrictive policy. Hopefully, many Fed members will take this weekend to think about their recent actions. Thankfully, the bond market is helping the Fed by taking yields lower and bringing down mortgage rates. However, a lot more work needs to be done.