A surprisingly weak July jobs report—disappointing payroll growth, downward revisions to previous months, an unexpected sharp rise in unemployment—has raised concerns about a) the pace of labor market deterioration and b) whether the odds of a recession have risen. “Today’s report indicates that the softening in labor market conditions has now gone beyond the amount that was welcome,” is how Goldman Sachs (GS) gently put it. JPMorgan (JPM) was more direct: “The July employment report was not good.”
But you get the message. And so, likely, will the Federal Reserve, prompting a response of more interest rates cut than many thought just 24 hours ago.
Again, GS:
Chair Powell said on Wednesday that the FOMC did not want to see material further cooling, and we think this crosses that boundary. As a result, we now expect an initial string of consecutive 25bp rate cuts in September, November, and December (vs. our previous forecast of cuts every other meeting). We think the slowdown in job growth in the July report likely overstates the decline in the underlying trend, but if the August employment report is also weak and confirms the slowdown in job growth, then a 50bp cut would become likely at the September meeting.
And JPM:
With the benefit of hindsight, it’s easy to say the Fed should have cut this week. It’s also easy to say they will cut soon. How soon and how much are harder questions. Even if the softening in labor market conditions moderates from here going forward, it would seem the Fed is at least 100bp offsides, probably more. So we now think the FOMC cuts by 50bp at both the September and November meetings, followed by 25bp cuts at every meeting thereafter. From a risk management perspective we think there’s a strong case to act before September 18th. But perhaps Powell doesn’t want to add more noise to what has already been an event-filled summer.
A possible silver lining here is that a decline in economic confidence will spur an increase in serious economic conversation in the US presidential race—on the stump, in interviews, and through at least one more televised debate. Some of that conversation would no doubt concern the economic record of the Biden-Harris administration, including the role its policies played in the inflation surge and its embrace of industrial policy. But, one would hope, lots of time would also be devoted to exploring what each candidate would do as president.
So many issues: the potential inflationary impact of each other’s ideas, Federal Reserve independence, deficits and debt, the future of the 2017 tax cuts, the possibility of a productivity boom powered by artificial intelligence and how that would affect workers, entitlement reform, trade policy toward both allies and geopolitical threats, how to generate clean energy abundance—oh, did I mention AI?
Just in case we do get such a debate, I would urge you to take a look at “A Balanced Plan for Fiscal Stability and Economic Growth,” a long-term budget blueprint recently put forward by a group of AEI scholars. So much great stuff in there. From that report:
Our plan seeks to achieve long-term fiscal stability and promote economic growth by aligning federal spending and revenue and pursuing market-based policy reforms. The plan reduces the national debt by over $60 trillion in 2054. In that year, debt as a share of the economy would drop significantly, from 166 percent of GDP in the baseline to about 85 percent of GDP as a result of the proposed reforms. More stringent spending policies could cut the debt further, but there is no easy or quick solution to the country’s fiscal challenges. The plan emphasizes savings in the major entitlement programs — Social Security, Medicare, Medicaid, and health insurance subsidies — while continuing to protect those less fortunate. The plan raises the same revenue (in present discounted value across the 30-year horizon) as the current law baseline, resulting in a revenue level above historical averages, as a share of GDP. The plan reforms the income tax by broadening the base and reducing statutory rates to promote economic growth.
It would be a good reference for analyzing and judging what the candidate might say over the next three months on a host of important economic issues.
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