Last week’s jobs report brought back eerie memories of last year for many CFOs, who prepared for the possibility of a recession even if they were confident one probably wouldn’t happen.
The latest figures from the Bureau of Labor Statistics, released Friday, reveal a marked slowdown in job growth across the United States. Only 114,000 jobs were added in July, a significant drop from June’s 206,000 and well below many economists’ expectations. The unemployment rate rose by 0.2 percentage points to 4.3%, causing major concerns about the strength of the U.S. job market.
This has triggered the “Sahm rule” — a metric that has been highly accurate in determining the likelihood of a recession. This rule says a recession has started when the three-month moving average of the U.S. unemployment rate is at least half a percentage point higher than the 12-month low, which is now the case.
Between the Sahm rule’s triggering, last week’s Fed meeting resulting in no rate changes, an underwhelming jobs report indicating the rapidly growing vulnerability of the labor market, the upcoming election and the Fed’s goal of 2% inflation just in reach, many speculate the Fed will have to provide some slack on the economy via a rate cut in their next meeting. If not, the U.S. economy’s current wobble may fall into a recession; which may trigger other economic lulls globally.
A cooling labor market
A strong and balanced labor market, something Federal Reserve Chair Jerome Powell has repeatedly said will help keep the economy in good standing during its soft landing post-pandemic, has now begun to cool off. There are 7.2 million people unemployed right now, according to the data, which is up from about 5.9 million last year.
There’s also data in the report that indicates increased wage pressure and issues around part-time employment. Hourly earnings only rose 3.6% year over year, and part-time employment because of economic issues rose by 346,000 to 4.6 million. As the data indicates, wages are sluggish — workers have been using part-time employment to supplement their lack of wage increases.
Industries with notable changes
- Health care: Added 55,000 jobs, with increases in home health care services (+22,000), hospitals (+20,000), and nursing and residential care facilities (+9,000).
- Construction: Gained 25,000 jobs, primarily in specialty trade contractors (+19,000).
- Transportation and warehousing: Increased by 14,000 jobs, with growth in couriers and messengers (+11,000) and warehousing and storage (+11,000), but saw a decline in transit and ground passenger transportation (-11,000).
- Social assistance: Rose by 9,000 jobs, slower than the previous 12-month average of 23,000 per month.
- Information: Decreased by 20,000 jobs but has changed little over the year.
Government employment, an area where growth has been criticized and one of the only areas where growth has been consistent as of late, added only 17,000 jobs. Areas like health care and social assistance have also seen a concentration of growth in recent months. When Louisiana Senator John Kennedy asked Powell about June’s increases by industry last month, Powell said “You’d rather see broader job creation that” and that this concentration indicated job growth was becoming “less broad” and was “narrowing.”
In July, the number of individuals on temporary layoff rose by 249,000, reaching 1.1 million. While the count of permanent job losses remained relatively stable at 1.7 million, revisions made to May and June in this report showed 29,000 fewer jobs than previously reported, further indicating a slowdown.
Broken down demographically, the only two groups who saw rises in unemployment in this report were males (up to 4% from 3.6% in June) and White workers (up 3.4% from 3%). Workers categorized as Black, Asian, Hispanic and women had no notable changes in unemployment.
The new normal
If the Fed doesn’t decide to cut rates in September, it may be looking to implement a new sense of realism into the economy by standing strong at keeping rates as is in pursuit of 2% inflation. Historically, current rates are relatively low; its metrics like inflation, wages and prices that have resulted in rates that were once normal creating unaffordable financing for things such as cars and homes for many Americans.
For CFOs, this not only means their employees may be more stressed because of personal finances, but their cost of capital for the organization increases. Despite many economists predicting a rate cut in September, CFOs who are monitoring these indicators for financial planning and forecasting should keep in mind the precedented hawkishness of Powell and his team to achieve their inflation goals.
The growing economic pressures stress the importance for CFOs to count on volatility, and implement strategic workforce planning and risk management. Staying ahead of these shifts is essential for making informed financial decisions, especially if a recession pounces on the economy before the year’s end.
