Interpretation of July US Non-farm Payrolls (NFP): Market Reaction May Be Excessive, Fed Remains Steadfast

Overview of Opinions

• The market's reaction to the July US Non-farm Payrolls (NFP) may be excessive, and the Fed seems to maintain a relatively optimistic outlook on the economic prospects.
• The increase in the unemployment rate in July is partly due to temporary factors such as hurricanes.
• The rise in unemployment and the underperformance of new jobs have structural reasons, but in the long run, it may help to curb inflation.

1. Market reaction may be exaggerated, Fed is relatively optimistic about the economic outlook

History shows that the U.S. market is usually more sensitive to interest rate cuts than to hikes. The July FOMC decision did not cut rates earlier as some optimistic expectations had anticipated, and the subsequently released US Non-farm Payrolls (NFP) data fell short of expectations, resulting in a sharp market decline, reflecting dissatisfaction with the Fed's "slow actions."

However, this sharp decline may not fully reflect the true state of the US economy. The Fed is likely not considering that the US is facing a significant recession risk. FOMC members typically have access to some economic data from the current month when making decisions. Powell maintained a somewhat hawkish stance in the July FOMC interview, indicating that even after seeing the weak US Non-farm Payrolls (NFP) data, he still chose to keep the option of continuing to curb inflation.

The Fed's cautious attitude towards interest rate cuts this time may have learned from the lessons of the massive monetary easing in 2020, worrying that cutting rates too early could lead to a rebound in inflation. Even well-known dovish officials have stated that overreacting to single-month data is unwise.

2. Weak monthly data does not equate to economic recession

Currently, a more accurate description of the US economic state is "slowing growth," rather than a deep recession. From personal income and consumption data, there has not been much change in personal consumption and disposable income in June compared to the beginning of the year. Production output has also improved, but employment data has significantly declined, and we cannot rule out the influence of random factors.

Recent releases of other data indicate that the resilience of the U.S. economy remains intact. The July ISM Non-Manufacturing Index and the early August data on initial jobless claims both exceeded expectations, easing market concerns about a precipitous recession. These data suggest that the U.S. economy may not be sliding towards the bottom as rapidly as pessimistic forecasts had anticipated.

3. The impact of hurricanes and other unforeseen factors on July employment data

In early July, the powerful hurricane "Beryl" struck Texas, USA, marking the strongest hurricane for the same period since 1851. It caused approximately 2.7 million households in the Houston area to be without power for several days, with some areas experiencing outages lasting nearly two weeks.

According to statistics, in July, the number of US non-farm workers who did not participate in labor due to severe weather reached 436,000, setting a historical high for July. Additionally, more than 1 million people could only work part-time due to weather reasons. Although officials claim that the hurricane had little impact, the academic and market communities generally believe that it had a significant effect on employment data.

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

After the pandemic, illegal immigrants have surged, competing with local workers in the low-skilled labor market, which may raise the unemployment rate while also potentially lowering wage levels in certain industries.

On the other hand, workers who left the labor market for various reasons at the beginning of the pandemic are gradually returning. This is a positive signal for economic recovery, but in the short term, it also increases the number of job seekers, which may lead to a rise in the unemployment rate.

The various relief measures during the pandemic have gradually been reduced, which has also forced some people who originally relied on welfare to re-enter the labor market, contributing to a rise in the unemployment rate to some extent.

The increase in labor supply caused by these factors may help to curb inflation in the long term, providing more policy space for the Fed to cut interest rates.