Last week’s data showed that the U.S. economy continues to defy expectations, though the data remains mixed at best.
While many leading indicators have been flashing red for most of the past two years, the lagging data has often been revised upwards. For instance, real gross domestic product (GDP), initially estimated to be growing at a seasonally adjusted annual rate of 2.8% in the second quarter, was revised up to 3% due to stronger consumption than initially thought. And yet, employment revisions came in unexpectedly negative. Employment growth over the past year was significantly weaker than initially estimated, with the Bureau of Labor Statistics suggesting there were 818,000 fewer jobs than originally reported. This marks the largest downward revision since 2009. Moreover, the downward revisions were confined to the private sector, and government hiring does little to reassure since it is expected to fall given the growing cost of government debt.
The labor market has been cooling slowly over the past two years, partly due to a significant decline in hiring rates and an increase in the labor force. This combination has resulted in a higher unemployment rate and dampened wage growth, although layoffs have remained low.
This week, we will receive a fresh jobs report that could either put recession fears to rest or reignite them. The forecast is for employment growth to stabilize, with an increase of roughly 160,000 jobs in August. Pay attention to wage growth. An expected slowdown in labor supply could slow employment growth while also moderating wage disinflation. However, an increase in layoffs could accelerate the downward pressure on wages.
Recall the Fed Chair’s Jackson Hole speech: “We do not seek or welcome further cooling in labor market conditions.” An increase in the unemployment rate, coupled with a larger-than-expected decline in wage growth or even wage deflation, would likely prompt the Fed to react with a larger rate cut than the 25 basis points currently anticipated by the market.
At the same time, the ISM manufacturing and services sector surveys are expected to continue showing weakness, with the manufacturing sector remaining firmly in contraction territory.