July US Non-farm Payrolls (NFP) Interpretation: Market Reaction May Be Overdone, Resilience of the US Economy Remains

Summary of Opinions

• The market's reaction to the US Non-farm Payrolls (NFP) may be excessive, reflecting disappointment over the failure to cut interest rates.
• The rise in the unemployment rate in July is partially attributed to temporary factors such as hurricanes.
• The rise in unemployment and job growth falling short of expectations have structural reasons, but in the long term, they may help to curb inflation.

1. Market response or overreaction, the Federal Reserve's assessment of recession risks is relatively cautious

History shows that Wall Street's desire for loose monetary policy often outweighs concerns about tightening policies. The July FOMC decision did not cut interest rates early as some optimistic expectations had anticipated, coupled with weak US Non-farm Payrolls (NFP) data, leading to a significant market decline, reflecting dissatisfaction with the Federal Reserve's "slow actions."

However, the Federal Reserve may not consider that there is a serious risk of recession at present. FOMC members usually have access to some economic data for the month when making decisions. Powell's statements after the July FOMC still retained a certain hawkish stance, indicating that even after seeing weak US Non-farm Payrolls (NFP), the Federal Reserve still hopes to keep the option to continue suppressing inflation.

The Federal Reserve's cautious attitude towards interest rate cuts this time may have drawn lessons from the excessive easing policies of 2020. A premature and substantial rate cut could trigger self-reinforcing market expectations, leading to a sharp decline in government bond yields and a rebound in inflation, which is clearly not what the Federal Reserve desires.

2. Weak monthly data is insufficient to determine an economic recession

The current accurate description of the U.S. economic situation is "slowing growth" rather than "deep recession". From indicators such as personal income and consumer spending, the June data has not changed much compared to the beginning of the year. Although there has been a noticeable decline in employment data, it is still necessary to consider the impact of random factors.

Recent data released also shows that the U.S. economy remains resilient. The ISM Non-Manufacturing Index for July and the initial jobless claims data for early August both exceeded expectations, alleviating market panic to some extent. This data indicates that the U.S. economy may not be sliding into recession as rapidly as pessimistic forecasts suggest.

3. The decline in July's US Non-farm Payrolls (NFP) data has occasional factors.

In early July, Hurricane "Beril" made landfall in Texas, USA, becoming the strongest hurricane for the same period since 1851. Its impact resulted in approximately 2.7 million households and businesses in the Houston area experiencing prolonged power outages, with some areas still not having restored power more than ten days after the hurricane made landfall.

According to the data from the Bureau of Labor Statistics (BLS), the number of non-farm employees not participating in labor due to severe weather in July reached 436,000, setting a historical high for July and more than ten times the average level for July since statistics began in 1976. In addition, over 1 million people were only able to work part-time due to weather reasons. These factors are likely to have a significant impact on the US Non-farm Payrolls (NFP).

IV. Structural Factors Contributing to the Rise in Unemployment Rate Due to Increased Immigration and Labor Return

The large influx of illegal immigrants after the pandemic has impacted the local labor market. These immigrants are often willing to accept lower wages and working conditions, competing with local workers in the low-skilled labor market, which may drive up unemployment rates and depress wage levels in certain industries.

On the other hand, workers who left the labor market for various reasons in the early stages of the pandemic are gradually returning. As pandemic restrictions are eased, these workers are starting to reassess their employment situations and re-enter the labor market. While this is a positive sign for economic recovery, it may lead to a rise in the unemployment rate in the short term.

The gradual reduction of unemployment benefits and other financial support measures during the pandemic has also prompted some workers reliant on welfare to re-enter the labor market, contributing to a certain extent to the rise in the unemployment rate.

The increase in labor supply is actually a signal of economic recovery in the long term, and is expected to have a restraining effect on inflation, providing more policy space for the Federal Reserve's interest rate cuts.