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What Do July’s Strong Employment Numbers Mean for Interest Rates and the Economy?

What Do July’s Strong Employment Numbers Mean for Interest Rates and the Economy?

Will the 528,000 new jobs added (nearly double the estimate) give prospective homebuyers confidence to stop canceling deals or step back into the market?

Despite the Fed enacting its second consecutive 0.75 percentage point interest rate increase in an effort to tamp down runaway inflation without creating a recession, employers still needed workers! Incredibly, these July numbers bring total employment above their February 2020 level, as the U.S. economy added 528,000 jobs marking a period of very strong hiring.

The American public should be pleased with near-record low unemployment as that generally means higher wages and/or less time on unemployment, but economists see the potential downside of the robust numbers.

And while some economists point to this as potential for a growing economy, others fear that the jobs increase could be signaling a reduction in efficiency (hence the need for more employees and lower long-term GDP potential) and offer the Fed ‘cover’ to raise interest rates even higher at their next meeting.

What kind of jobs are being added?

In a New York Times article, Amy Glaser, a senior vice president at the global staffing agency Adecco, said her firm was still struggling to fill hourly jobs, especially in retail and logistics. Employers may not have made those positions attractive enough, and, increasingly, may do without them.

“I think we do have a gap in the jobs that are available and the desire to do those jobs,” Ms. Glaser said. “We know there are tens of thousands of warehouse jobs out there, but standing on your feet for 10 hours a day isn’t everyone’s cup of tea.”

Jobs are strong, but inflation is at a 40-year high.

The July pace of hiring surged unexpectedly, as the U.S. job market showed surprising strength in the face of high inflation and softening economic activity.

While the jobs report is good news for the U.S. economy, as it is counter to the idea that a recession is imminent, it also puts pressure on the Federal Reserve to continue with its aggressive interest rate hikes as it attempts to tame inflation.

According to Federal Reserve Chairman Jerome Powell, “If you think about what a recession really is, it’s a broad-based decline across many industries that’s sustained for more than a couple of months. This doesn’t seem like that.” Meanwhile, according to how a recession is defined, the U.S. economy is in one as Dawit Kebede, senior economist for the Credit Union National Association, points out “a recession is defined as two consecutive quarters of negative growth in the GDP.”

Meanwhile, higher borrowing costs that come with rising inflation can take a toll on the economy. Rising mortgage rates have cooled a red-hot housing market. Sales of previously occupied homes dropped in June for the fifth straight month. Meanwhile, home contract cancelations increased to nearly 15% in July (that’s over 1 out of every 7 contracts have canceled the home-purchase deal).

So, will there be another drop in housing statistics in July? Probably…at least from what we’ve seen in data that we’ve been compiling since July 5, 2022, but that’s a work in progress.

Inflation and other factors are causing interest rates to remain volatile.

As we mentioned earlier, Fed policymakers voted recently to increase the central bank’s benchmark rate by 75 basis points to 2.5% as they battle the worst consumer price increases since the 1980s. In response, Freddie Mac’s Chief Economist Sam Khater stated, “Mortgage rates remained volatile due to the tug of war between inflationary pressures and a clear slowdown in economic growth. The high uncertainty surrounding inflation and other factors will likely cause rates to remain variable, especially as the Federal Reserve attempts to navigate the current economic environment.”

Where will jobs be in August?

Some economists worry that signs of weakness are starting to appear in hiring, threatening one of the United States’ last remaining redoubts of economic strength.

“When we look across the labor market, we are seeing broad indications of cracks beginning to show,’’ said Sarah House, senior economist at Wells Fargo. “Overall conditions aren’t nearly as strong as what we were seeing three to six months ago.’’