US Jobs Take Center Stage Amid Inflation Week
As the US gears up for the release of the consumer price index this Wednesday, the focus remains firmly on the labour market rather than inflation. The July employment report, released ten days ago, triggered a global market meltdown, leaving economists and analysts puzzled about the true state of the American labour market. Despite stocks recovering some losses, the uncertainty surrounding employment figures persists.
Economists have proposed various theories to explain the unexpected rise in unemployment in July. Some suggest that the increase is due to the arrival of immigrants who have yet to secure employment. However, data indicates that the number of new entrants to the labour market actively seeking jobs has decreased. Others point to Hurricane Beryl as a potential factor for the sluggish hiring pace, although the Bureau of Labor Statistics reported no discernible impact from the storm, and other surveys during the period did not mention it.
Federal Reserve officials have maintained a relatively positive outlook on the labour market despite the recent report. San Francisco Fed President Mary Daly described the labour market as “reasonably solid,” echoing sentiments from Kansas City’s Jeffrey Schmid and Fed Governor Michelle Bowman. While cautioning against overemphasising a single month’s data, Chicago’s Austan Goolsbee and Boston’s Susan Collins emphasised the need for central bankers to monitor any signs of weakness in the labour market.
Recent jobless claims data, which showed the largest decline in nearly a year, have added to the debate. Economists like Stephen Stanley from Santander US Capital Markets argue that the trend in claims suggests the recent rise in the unemployment rate may not accurately reflect the labour market’s condition. He notes that while gross hiring is slowing, companies have not yet started significant job cuts. However, Bloomberg Economics’ Eliza Winger and Anna Wong hold a more pessimistic view, predicting a further rise in the unemployment rate to 4.5% by October, arguing that claims data have lost their predictive power.
In a survey conducted by Bloomberg, 60% of economists described the job market as solid, albeit slightly softened, while 24% believed it had weakened significantly but would likely stabilise. Only 16% anticipated significant job losses. Meanwhile, the upcoming US consumer price index report, once a hot topic among economists, seems to have taken a backseat. The general consensus is that inflation is moving in the right direction, with Wells Fargo economists humorously reminding everyone of its existence in a recent note.
The Week Ahead
Looking ahead, China’s data release on Thursday is expected to show slight improvements in the economy for July compared to June, though growth remains sluggish. Industrial output growth may have accelerated to 5.5%, but this pace is still slow enough to slightly lower the year-to-date tally. Retail sales are projected to rise to 2.6%, while the seven-month pace is expected to drop to 3.5%. Fixed asset investment is anticipated to remain steady, with a moderated decline in property investment.
A recent working paper from the San Francisco Fed suggests that the Beveridge Curve, which measures the ratio of job vacancies to job seekers, is a better gauge of economic slack than the unemployment rate. Economists Regis Barnichon and Adam Shapiro argue that this ratio provides superior information about future inflation, consistently outperforming the unemployment rate from the interwar period to the recent post-Covid inflation surge. The good news is that this ratio has recently decreased significantly, indicating a normalisation of labour slack in the US.
