The July jobs report was a massive surprise. U.S. employers added 528,000 jobs in July, more than double the consensus forecast. Hiring was broad-based across sectors, and average hourly earnings rose by 5.2 percent. Although the terminology ultimately does not matter much, this does not appear to be an economy in “recession.” Still, this report in some ways worsens the growth outlook. Bond traders are now expecting higher and more sustained inflation and, as a result, have begun to price in more hawkish Fed policy going forwards, culminating in a higher terminal rate. Especially since the Fed has refrained from offering guidance and has instead committed to responding to incoming data, the market thinks that a 75-basis point hike in September is on the table.
This job report suggests that a soft landing might be hard to pull off. Additionally, given the strength of the labor market, it is unclear whether the Fed will be able to sustainably bring inflation all the way down to two percent, and they might just declare victory at a slightly higher rate. Although today a too-hot economy is the primary concern, the jobs report highlights that the labor force participation rate remains below pre-Covid levels and is not showing clear signs of improvement — a dynamic that threatens to dampen longer-term growth prospects.
Thomas Triedman, a sophomore at Yale, is a Summer 2022 Collegiate Associate at the Manhattan Institute
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