Jobs growth in the US continues to cool, cementing the case for a couple of Fed rate cuts this year. The pace of job creation is now in-line with the ‘breakeven’ rate for payrolls, estimated by the Hamilton Project to be between 160-200k. The San Francisco Fed suggests the recent surge in immigration may have caused the short-run breakeven rate to rise to as much as 230k. The jobless rate ticked up again in June, from 3.96% to 4.05%, the highest since November 2021. But a modest rise in the unemployment rate, from a supply-side shock, is vastly different to one caused by demand deterioration.
It would be easy to get carried away, given the slide in the non-manufacturing ISM new orders index. Many commentators will now claim the Fed has fallen far behind the curve, and that it should slash rates quickly to avoid a sharper recession. There remains a bias, amongst economists, towards trying to predict the next major downturn. But today’s backdrop is markedly different to previous cutting cycles, including, but not confined to, much healthier household balance sheets, and government deficit spending of 7.0% of GDP.
There are important nuances in the recent labour market report too. Layoffs remain low. The number of permanent job losers declined from 1.764mn to 1.643mn last month. The share of those not in the labour force, that currently want a job, dipped from 5.7% to 5.2% in June. The rise in the prime-age labour force participation rate to new secular highs (83.70%) does not tally with a broader deterioration in the labour market either. Given the clamour for lower Treasury yields, the bond market may overreact if there is another soft CPI print out of the US on Thursday. But the secular trends driving long-dated bond yields higher over the coming years remain in place.
