July employment data disappointing raises market concerns, but economic outlook remains resilient.

Overview of Perspectives

• The market has overreacted to the July employment data, and the Federal Reserve may hold a relatively optimistic view on the economic outlook.
• The increase in the unemployment rate in July was partly affected by short-term factors such as hurricanes.
• The rise in unemployment rate and the new jobs added being below expectations have structural reasons, but in the long term, they may help to curb inflation.

1. The market may be overinterpreting the July employment data, and the Federal Reserve may believe that economic risks are manageable.

History shows that Wall Street is often more eager for easing policies when facing an economic downturn, with reactions to interest rate cuts typically greater than reactions to rate hikes. In July, the Federal Reserve did not cut rates earlier than some optimistic expectations, combined with poor employment data, leading to significant fluctuations in market sentiment.

However, the Federal Reserve may have had access to some of the economic data for the month when making its decision. Powell maintained a somewhat hawkish stance in a July interview, indicating that even with weak employment data, he was not overly pessimistic about the economy. The Federal Reserve may have learned from the lessons of excessive easing in 2020, worrying that premature interest rate cuts could impact market expectations and lead to a resurgence of inflation.

Some economists also believe that one should not overinterpret single-month data. Overall, the Federal Reserve seems to think that economic risks remain within a controllable range.

2. Monthly employment data weakness is insufficient to determine an economic recession

The more accurate description of the current state of the U.S. economy is "slowing growth" rather than "deep recession." From various indicators such as income and consumption, the U.S. economy still shows a certain degree of resilience. Personal consumption and disposable income in June have not changed much compared to the beginning of the year, and production output has also improved.

Recent data released also shows that the economy still has growth potential. The ISM non-manufacturing index for July and the number of initial jobless claims in early August were both better than expected, which somewhat alleviated market concerns about a sharp decline in the economy. This data suggests that the U.S. economy may not be deteriorating as quickly as pessimistic expectations had suggested.

3. July employment data affected by hurricanes and other random factors

In early July, Hurricane "Barry" made landfall in Texas, USA, becoming the strongest hurricane for the same period since 1851. It caused extensive power outages for many households and businesses, significantly impacting employment.

Data shows that the number of non-farm workers who did not participate in labor in July due to severe weather reached a record high, more than 10 times the average level of previous Julys. Although officials claim that the impact of the hurricane was limited, the economics community and the market generally believe that this statement does not match the reality. The damage to the job market caused by the hurricane is likely to have had a significant impact on the employment data for that month.

4. The increase in immigration and the return of labor are structural factors contributing to the rise in unemployment rate.

The increase in illegal immigration after the pandemic has impacted the low-skilled labor market. This has not only raised the unemployment rate but may also have depressed wage levels in certain industries.

On the other hand, workers who left the labor market in the early stages of the pandemic are gradually returning. Although this is a positive signal for economic recovery, it has also led to an increase in the number of job seekers in the short term, pushing up the unemployment rate.

The government's relief measures during the pandemic have gradually been reduced, forcing some individuals who relied on relief to return to the job market. These factors have collectively led to an increase in labor supply, driving up the unemployment rate.

However, the increase in labor supply is actually a signal of economic recovery, which helps to curb inflation in the long term and provides greater space for the Federal Reserve's future monetary policy operations.