Recession already here? US non-farm payrolls added only 114,000 jobs in July, well below expectations, pushing the unemployment rate up to 4.3%, hitting a nearly three-year high

The US July non-farm payrolls report shocked the market, with new job additions hitting a three-and-a-half-year low, the unemployment rate rising to its highest level in nearly three years, and triggering the 100% accurate recession indicator - the Sam Rule. Panic spread rapidly, with traders starting to bet on a 50 basis point rate cut in September, and predicting that the total rate cuts for this year will exceed 110 basis points.

Data released by the US Bureau of Labor Statistics on Friday showed:

Non-farm payrolls in the US increased by 114,000 in July, the lowest since December 2020, far below the expected 175,000, and significantly down from the previous 206,000 (revised down to 179,000).

The unemployment rate in July rose by 0.2 percentage points from the previous month to 4.3%, hitting the highest level since October 2021, exceeding the expected 4.1%.

Wage inflation continued to cool off, with hourly wages rising by 0.2% in July, slightly lower than the expected and previous values of 0.3%, and a year-on-year increase of 3.6%, below the expected 3.7% and the previous value of 3.9%.

The labor force participation rate in July was 62.7%, up 0.1 percentage points from the previous month's 62.6%, and higher than the expected steady level.

After the data was released, US stock index futures fell sharply. Nasdaq futures dropped over 2%, S&P 500 index futures fell 1.6%, and Dow futures fell 1.2%; US Treasury yields quickly declined, with the yield on the 10-year Treasury note falling by 19 basis points to a year-to-date low of 3.79%; the US dollar index fell sharply.

Traders increased their bets on rate cuts in 2024, now expecting a cut of 111 basis points, with traders betting that the Fed will cut rates by 50 basis points in September.

Clark Bellin, Chief Investment Officer at Bellwether Wealth, stated:

Despite the significant resilience of the labor market during the past two years of rate hikes, the Fed must continue as expected to cut rates in September to prevent further slowdown in the labor market.

Unemployment Rate Triggers Sam Rule, Recession Alarm Bells Ring

Note that the US unemployment rate has surged by 0.6% from its low point this year, triggering the Sam Rule, a recession prediction based on unemployment rate, as noted by the well-known financial blog Zerohedge, indicating that the US economy has begun to enter a recession.

According to the Sam rule, if the unemployment rate (based on a three-month moving average) rises by 0.5 percentage points from last year's low point, the economic recession has begun. Since 1970, this indicator has had an accuracy rate of 100%.

Some analysts do not believe that the U.S. economy has entered a recession. Jeffrey Roach, Chief Economist at LPL Financial, stated:

The latest situation in the labor market is consistent with an economic slowdown, but it does not necessarily mean a recession. However, early warning signals indicate that the economy will further weaken.

Roach pointed out a relatively positive phenomenon, with the number of part-time workers for economic reasons in July surging to 4.57 million, an increase of 346,000 from the previous month, reaching the highest level since June 2021.

Another indicator measuring the unemployment rate, which covers "discouraged workers" who are no longer actively seeking employment and those who can only find part-time work due to economic reasons, rose by 0.4 percentage points to 7.8%, the highest level since October 2021.

At the same time, the number of long-term unemployed individuals, those unemployed for over 27 weeks, has also increased to a total of 1.54 million, the highest since February 2022.

Despite some concerns about the economic growth outlook, Federal Reserve Chairman Powell expressed confidence in an "economic soft landing" on Wednesday, stating that the persistently declining inflation has strengthened people's confidence in a quick rate cut.

It is worth noting that the unexpected 0.2 percentage point increase in the unemployment rate was mainly due to a temporary increase of 249,000 in layoffs after Hurricane Beryl. Analysts expect the unemployment rate to fall to around 4.1% in August.

Gap Narrows Between Household and Establishment Surveys

The newly added employment data for the past few months has once again been revised downward, by 2,000 in May and 27,000 in June, totaling a downward revision of 29,000 over the two months. Out of the past 6 months, data for 5 months has now been revised downward.

The number of newly added jobs in the household survey is half of that in the establishment survey, at only 67,000, but the gap between the two surveys has significantly narrowed compared to previous months.

This suggests that the employment numbers in the establishment survey may have finally peaked, while the household survey data has remained unchanged over the past year.

Information Industry Employment Declines by 20,000, Healthcare and Construction Industries Increase

Looking at the employment structure from the non-farm payroll report, employment in the healthcare, construction, transportation, and warehousing sectors continued to rise in July, while the information industry saw a decline

The healthcare industry added 55,000 new jobs, the construction industry increased by 25,000 jobs,
the transportation and warehousing industry added 14,000 jobs, and social assistance increased by 9,000 people;
The information industry saw a decrease of 20,000 jobs, but the change compared to the same period last year was not significant.
Government employment numbers also did not change dramatically, increasing by 17,000 people. Following a significant increase in employment numbers in the first quarters of 2023 and 2024, government employment growth has slowed in recent months.
In addition, employment in other major industries such as mining, manufacturing, retail, finance, business services, and leisure remained relatively stable.