MNI INTERVIEW: No Alarm Bells Yet In July US Unemployment Jump

MNI (WASHINGTON) - Cooling demand for workers is driving up U.S. unemployment, but there's scant evidence of a recession taking hold in the July jobs report even as the jobless rate reached its highest since 2021, Yongseok Shin, a Washington University in St. Louis economist and academic consultant to the Federal Reserve Bank of St. Louis, told MNI. 

A 4.3% unemployment rate remains low by historical standards, and its 0.9 percentage point rise from 50-year lows over the past year is no cause for alarm, especially as other parts of the economy show strength and resilience, Shin said in an interview. 

"In essence I don’t think this is surprising. A 0.9 pp increase over a year is not unprecedented, and in a recession the unemployment rate would rise much faster," he said. "Markets just got used to very low numbers, and any change feels like a big departure." 

The Fed has laid out a plan to slowly dial back interest rates beginning as soon as next month, and the FOMC has shown willingness to take drastic actions to help the economy if necessary – all of which will continue to support a soft landing for the economy, he said. (MNI INTERVIEW: Fed Should Avoid Rushing Into Rate Cuts-George)

LAYOFFS FEW

The unemployment rate barely budged from 4% for months after the Fed began hiking rates at a rapid pace in 2022. When it did finally begin to rise over the past year, the increase has been driven by less hiring rather than layoffs, Shin noted. 

Job openings fell to 8.2 million at the end of June from a pandemic peak of 12.2 million, and the hires rate sank to 3.4%, the lowest since April 2020. Yet layoffs also decreased to 1.5 million or a 0.9% rate, also the lowest since April 2020. 

"It’s reassuring because firms are not putting out as many vacancies, rather than increasing layoffs dramatically. Pushing people out is a much scarier scenario because it would indicate firms think they have too many workers and the economy is going bad," Shin said. 

He added he'll be watching the July Job Openings and Labor Turnover Survey data, due to be released at the end of the month, for any change in that trend. 

STILL HOARDING

One reason firms haven't laid off as many workers in recent months is they still remember the difficulty in hiring them after the pandemic, Shin said. A burst of productivity growth could make it harder again to hire, though that shift could happen slowly over a long period, he said. 

If that labor hoarding behavior changes at some point, the unemployment rate would shoot up even faster, he said. 

A more balanced labor market and receding inflation has built a case for the start of rate cuts as soon as September, and markets have already priced in a series of moves taking the fed funds rate target just under 3.5% by the end of next year. 

"Rates are coming down and markets understand how the Fed will react," Shin said. "That's what matters." (See: MNI INTERVIEW: Fed Could Be Forced To Play Catch Up- Coronado)