NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: July Payrolls Underwhelm as Fed Holds Firm

August 02, 2024
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

While we do not view recent data as indicative of a near-term recessionary scenario, we do continue to expect at least 2-3 rate cuts this year and encourage thoughtful capital deployment, particularly as it relates to lengthening duration for cash and short-term fixed income assets.

July’s non-farm payrolls release indicated that the U.S. economy added only +114k jobs in the month, far less than the consensus expectation of +175k. Driving this month’s modest gains were healthcare, construction, government hiring, and transportation & warehousing, which added +55k, +25k, +17k, and +14k, respectively. Outside of these sectors, hiring was flat to down with a notable decline in information payrolls of -20k. In addition, May and June payrolls were revised lower by -2k and -27k, respectively. We believe payrolls are likely to remain somewhat volatile as the economy inflects towards the soft landing scenario.

More concerning was the meaningful increase in the unemployment rate from 4.1% to 4.3% (4.253% rounded) in the month – its highest level since October 2021. While the upswing in the unemployment rate is partially attributable to another welcomed increase in the participation rate to 62.7% from 62.6%, we believe the magnitude of the month-over-month tick up is likely to heighten concerns that the Federal Reserve (Fed), in their quest to deliver on their inflation mandate, has waited too long to adopt a more accommodative stance.

Adding to the argument for a near-term shift in policy is wage growth, as wages grew by only +0.2% month-over-month and +3.6% year-over-year; which marks the lowest year-over-year gain since May 2021 and indicates, in our view, that the labor market is unlikely to be a driver of further inflation over the coming quarters. As for implied demand for workers, hours worked fell from 34.3 to 34.2 hours, with manufacturing hours worked coming in 39.9 hours.

Looking more closely at the household survey, the number of unemployed persons rose by +349k, although admittedly there was a surge in temporary layoffs in the month of +249k and there are indications that weather was a factor in this uptick. In addition, the number of individuals working part time for economic reasons, which implies that they would prefer full time work instead, rose by +346k.

Today’s report, coupled with a light employment cost report and a weak ISM Manufacturing print of 46.8, down from 48.5 in July yesterday, are translating to a sharp reaction in both the equity and bond markets. Stocks are under meaningful pressure this morning after a tough session yesterday, particularly for large cap technology names. More notable are the moves in yields, as the 2 Year Treasury is off almost 20 basis points while the 10 Year Treasury is down to 3.85% after falling as low as 3.79%.

While we anticipated that the narrative would shift from inflation to growth this year, the first three months of the year created a difficult situation for the Fed as inflation reports pointed to a potential reacceleration. With disinflation now seemingly back on track, we believe the risk to the Fed’s other mandate -- maintaining maximum employment -- is likely to dominate, particularly if economic data begins to point to a deceleration of economic growth past the point of a soft landing. While we are not anticipating that recent data is indicative of a near-term recessionary scenario, we do continue to expect at least two to three interest rate cuts this year and, as a result, encourage thoughtful capital deployment, particularly as it relates to lengthening duration for cash and short-term fixed income assets.

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