Dissent Vindicated? Payroll Data Reveals Economic Weakness
The Federal Reserve's recent decision to keep its target interest rate range at 4.25% to 4.50% was marked by an unusual double dissent from Governors Christopher J. Waller and Michelle W. Bowman. They warned that despite seemingly stable employment numbers, the U.S. labour market was dangerously close to "stall speed," arguing urgently for immediate rate cuts.
July’s nonfarm payroll report released last week has dramatically validated their concerns. The headline figure showed just 73,000 new jobs, far below the median expectation. More significantly, earlier months were revised drastically downward: May's job growth was cut from 144,000 to only 19,000, and June's from 147,000 to just 14,000. These revisions erased a total of 258,000 previously reported jobs, significantly altering perceptions of the labour market’s strength.
Detailed sector analysis further highlights these vulnerabilities. July's job growth was primarily concentrated in health care and social assistance, while government employment saw a decline. Key sectors sensitive to interest rate hikes, such as construction and manufacturing, showed little change. Even the leisure and hospitality industry, previously resilient, barely expanded, reflecting broader consumer spending constraints amid persistent inflation and high borrowing costs.
The Household Survey, used to calculate unemployment rates, paints an even bleaker picture, showing an outright decline in the number of employed people. As a result, the unemployment rate rose to 4.2%, alongside a slight drop in labour force participation. This suggests increased worker discouragement, a significant labour market weakness masked by headline employment figures alone.
A key reason for these dramatic downward revisions is the Bureau of Labor Statistics' (BLS) use of the Birth-Death Model, which estimates employment changes from new and closed businesses. While effective during stable economic times, this model can lag and requires significant revisions during periods of economic change, leading to overestimations of job creation in retrospect.
These developments place Federal Reserve Chair Jerome Powell in a challenging position. Previously relying on labour market resilience to justify maintaining higher interest rates, Powell now faces undeniable evidence of economic fragility. This calls into question the Fed's restrictive monetary policy, suggesting it might be causing deeper economic harm than intended.
The weak payroll data provides new support for policymakers who have argued that the Fed's policies have been too restrictive. Federal Reserve Chair Jerome Powell is under pressure to respond. He faces the challenge of a potential rate cut, which could be seen as giving in to political pressure, while maintaining current rates could be viewed as ignoring clear signs of economic weakness.
Attention now shifts urgently to upcoming inflation data, which will be crucial for determining the Fed’s next steps. The July Consumer Price Index (CPI) report, scheduled for release on Tuesday next week, will be a pivotal moment. Only surprisingly strong inflation figures in that report could justify holding current rates. July’s payroll data strongly supports Governors Waller and Bowman's earlier dissent, warning that delaying rate cuts risks significant economic damage.
The critical question is whether the Federal Reserve has already waited too long to address clear signs of labour market distress. With evidence of economic weakness now indisputable, the Fed’s next moves—informed by the upcoming inflation report—will be crucial in averting further economic deterioration.
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