Analysis of the U.S. Non-Farm Payroll Data for July: Market Reaction May Be Overly Pessimistic

Main Points

• Market reactions may be excessive, reflecting a sensitive mindset toward the failure of interest rate cuts.
• The rise in the unemployment rate in July is partially due to temporary factors such as hurricanes.
• The structural reasons for the unemployment rate and job growth being below expectations may, in the long run, help to curb inflation.

1. Market reaction may be excessive, the Federal Reserve still has confidence in the economic outlook.

History shows that the U.S. market is often more sensitive to interest rate cuts than to hikes, and its tolerance for inflation is also higher than for deflation. The July FOMC decision did not cut rates early as some optimistic expectations had anticipated, and along with poor non-farm data, this triggered a strong market reaction.

However, this emotional reaction does not necessarily reflect the actual economic situation. The Federal Reserve is likely not to believe that the U.S. is facing a serious risk of recession. FOMC members are usually able to access some economic data from the current month when making decisions, and they maintained a certain hawkish stance at the July meeting, indicating confidence in the economic outlook.

Federal Reserve Chairman Powell emphasized the need to weigh the risks of premature action against the risks of delayed response, showing concern over the potential negative impacts of an early rate cut. Even dovish officials stated that there should not be an overreaction to single-month data, supporting the Federal Reserve's current decision-making.

2. Weak monthly data does not equate to economic recession

The more accurate description of the current state of the U.S. economy is "slowing growth" rather than a deep recession. The National Bureau of Economic Research (NBER) is responsible for defining periods of economic recession, primarily considering indicators such as personal income, employment, consumer spending, and industrial output.

From the perspective of income and consumption, the June data has not changed much compared to the beginning of the year. The year-on-year growth of personal disposable income slightly decreased from 4.0% to 3.6%, while personal consumption expenditure increased from 1.9% to 2.6%. Production output has also improved, with only employment data showing a significant decline. Therefore, the U.S. economy may still have some buffer space before a real recession.

Recent economic data also indicates that the U.S. economy still has a certain degree of resilience. The ISM non-manufacturing index for July and the initial jobless claims data for early August both came in better than expected, somewhat alleviating market panic. This data suggests that the U.S. economy may not be deteriorating as quickly as pessimistic expectations.

3. The decline in July's non-farm payroll data has random factors.

At the beginning of July, a strong hurricane "Beryl" hit Texas, USA, causing widespread power outages and disruptions to economic activities. According to data from the Bureau of Labor Statistics (BLS), the number of non-farm employees who did not participate in labor due to severe weather reached 436,000 in July, setting a historical high for the month, far exceeding the average levels of previous years. In addition, over 1 million people could only engage in part-time work due to weather reasons.

Although the BLS claims that "the hurricane had little impact on employment data," the academic and market communities generally believe that this statement does not reflect the actual situation. The damage to the job market caused by the hurricane is likely to have had a significant impact on the number of new jobs and the unemployment rate.

4. Structural Factors of Rising Unemployment Rate

In addition to temporary factors, there are also some structural reasons for the rise in unemployment rate:

1. Increase in illegal immigration: After the pandemic, a large number of illegal immigrants have flooded into the United States, competing with local workers in the low-skilled labor market, raising the unemployment rate and potentially depressing wage levels in certain industries.

2. Labor force return: Workers who left the labor market during the pandemic are gradually returning, including those who temporarily exited due to long COVID, health concerns, childcare responsibilities, and other reasons. This increases the number of job seekers and may lead to a rise in the unemployment rate in the short term.

3. Reduction of government assistance measures: As unemployment benefits and other financial support measures during the pandemic gradually decrease, workers who originally relied on these benefits are forced to re-enter the labor market, which has also contributed to a certain extent to the increase in the unemployment rate.

The increase in labor supply caused by these factors is actually a signal of economic recovery in the long run, and may have a positive impact on curbing inflation, providing more policy space for the Federal Reserve's future interest rate cuts.