US Job Market: Is Growth Slowing Down?

Despite the strong performance of the US job market in the first half of the year, there are increasing concerns about a potential slowdown in job growth. The July jobs report, scheduled for release on Friday, is expected to show an addition of 110,000 new jobs, a significant decrease from the 147,000 jobs added in June. The unemployment rate is also expected to rise slightly from 4.1% to 4.2%, and average hourly earnings are projected to increase by 0.3%, higher than June's 0.2%. If these forecasts hold true, they will reinforce the idea that the job market is slowing, although this may not necessitate a response from the Federal Reserve.

Monthly Job Creation: A Closer Look

Data from the US Bureau of Labor Statistics indicates that the average number of new jobs added monthly in the US through June was between 102,000 and 158,000. These robust gains were generally seen as reaching a "breakeven point," where new jobs are keeping pace with labor force growth, thereby maintaining a stable unemployment rate. However, Fed's Barkin stated that the job market's "breakeven point" at the end of June has now moved back to around 80,000 to 100,000 jobs per month.

Job Market Performance Compared to Previous Periods

Excluding the 2020 pandemic recession period, the current rate of job growth of 130,000 jobs per month is the lowest since 2010 (during January-June), when the US economy was recovering from the Great Recession. This raises questions about the sustainability of current growth.

Federal Reserve Chairman's Remarks

Federal Reserve Chairman Powell stated at a press conference following the policy meeting on Thursday, "You do see job growth slowing, but labor supply is also slowing. So, the labor market is in balance." He pointed out that the unemployment rate is the key indicator when monitoring the labor market.

The Impact of Immigration on the Labor Market

A June analysis by Wells Fargo economists showed that foreign-born workers (regardless of legal status) have contributed approximately three-quarters of labor force growth since February 2020. They noted that recent efforts to curb illegal immigration are leading to a shrinking labor force size. This demographic dynamic adds an extra layer of complexity to labor market analysis.

Mixed Indicators for the Job Market

In the week that coincided with the non-farm payrolls survey period, initial jobless claims were 221,000, a significant decrease from the 246,000 in the prior month's reference period. Continuing jobless claims fell from 1,964,000 to 1,946,000. The decrease in continuing claims may suggest that people who had difficulty returning to work have successfully found jobs. The S&P Global Purchasing Managers' Index (PMI) preview showed that employment increased for the fifth consecutive month, as companies added staff to cope with rising backlogs.

Challenges and Opportunities in the Job Market

On the other hand, the June Job Openings and Labor Turnover Survey (JOLTS) was weak, showing a decrease in job openings for the month, hiring falling to a one-year low, and the quits rate below the five-year average. In July, Challenger job cuts increased by 62,000, higher than June's 48,000. At the same time, The Conference Board’s labor market differential—the proportion of respondents who say jobs are plentiful versus those who say jobs are hard to get—fell again in July, to a new cycle low (also the lowest since early 2017).

Economic Uncertainty and Hiring Decisions

Recruiting has become lackluster outside of a handful of industries. Companies are reluctant to add staff in large numbers, mainly due to uncertainty about the final level of tariffs in Trump's volatile trade war. “When businesses can’t predict where the economy is headed and therefore can’t plan operations, they tend to wait for more information,” NerdWallet senior economist Elizabeth Renter wrote earlier this week. “In the current environment, that predictive information is changing weekly, so businesses are stuck in a constant holding pattern when it comes to expanding or shrinking staff.”

Business Outlook and the Federal Reserve

The Federal Reserve's latest Beige Book shows that employment increased overall slightly, hiring remained generally cautious, while labor supply improved. The report also noted that while layoff reports were limited across industries, they were more prevalent in manufacturing. Looking ahead, many business contacts expect to delay major hiring and layoff decisions until uncertainty is reduced.

Impact of the Jobs Report on Markets

JPMorgan Chase's global market intelligence head Andrew Tyler believes that “The (non-farm payrolls) outcome is going to be positive, and the market would react positively to any number over 100,000.” Tyler pointed out that non-farm estimates from whisper sources are now generally higher than the market consensus, such as 115,000, suggesting that optimism is on the rise. He said that he's confident that we won’t see a dramatic decline in hiring. Over the long term, there are some issues, such as economic headwinds brought on by the trade war, but their size and timing are still tricky. We believe that we won’t see the impact of these headwinds in the July data.”

Optimistic Projections

Monthly employment reports are usually full of surprises, mostly to the upside. TS Lombard expects that to happen again on Friday. The firm said that high-frequency indicators from LinkUp show that non-farm payrolls could be as high as 199,000.

Federal Reserve Rate Cut Expectations

The Federal Reserve currently seems to be focusing on inflation more than employment, and Powell continues to believe that the labor market is performing “solidly.” He pointed out that the Federal Reserve would be willing to cut interest rates if the situation suddenly worsened, but this is not their baseline scenario. Given the uncertainty that Trump's trade policies have brought to the economy, there are signs that companies are postponing hiring plans, but officials are more concerned that rising costs will cause companies to pass these costs on to consumers in the face of tariffs. This uncertainty has put the Federal Reserve in a temporary bind, with board members Waller and Bowman voting in the July meeting to cut interest rates by 25 basis points, but the majority are still in a wait-and-see position. Powell said on Thursday that the majority of committee members believe that the labor market is at or close to full employment, but inflation is still far from the target. However, he also warned that there are downside risks to the labor market in light of uncertainty. At the interest rate meeting earlier this week, Powell did not provide guidance on the September interest rate decision and pointed out that there would be a lot of data to be released before then, and Friday's July non-farm payrolls report would be part of the puzzle that would help influence the Federal Reserve's September interest rate cut expectations. According to the Chicago Mercantile Exchange Group's (CME Group) Fed watch Tool, the market currently expects that the possibility of the Federal Reserve cutting interest rates in September has fallen to less than 50%. If the non-farm payrolls report is lower than 100,000 and the unemployment rate rises, this may indicate a weakening labor market, which would dampen the Federal Reserve's renewed hawkish expectations and put pressure on the US dollar, which would benefit the rebound in gold prices. However, if the non-farm payrolls report unexpectedly exceeds 150,000, the strength of the dollar may continue, as strong US jobs data may rule out the possibility of the Federal Reserve cutting interest rates twice this year.

Market Reaction: Will Gold See a New Downward Trend?

From a technical perspective, gold's 21-day simple moving average (SMA) confirmed the death cross on Wednesday from top to bottom of the 50-day moving average on a daily closing basis. The 14-day Relative Strength Index (RSI) lurks below the centerline, indicating that the downside bias of the gold price remains unchanged. Fxstreet analysts point out that if the weekly chart closes below the critical support level of $3,270 located at the 100-day simple moving average, the gold price may start a new downward trend, heading towards the low of June 30 of $3,248. The main line of defense for gold bulls lies at the low of May 20 of $3,205. Conversely, any rebound attempt requires stabilization above the zone formed by the 21-day and 50-day simple moving averages (near $3,340). Before that, gold must overcome the psychological hurdle of $3,300. If the rebound continues, the next upward resistance will be at the static resistance of $3,380.

Impact on the Stock Market

The jobs report to be released on Friday is also an important test for the US stock market. In the past few weeks, the US stock market has continued to reach new record highs. As cyclical stocks have significantly outperformed defensive stocks, stock valuations are close to their historical highs, and the stock market seems to be digesting a suitable combination of strong forward-looking growth expectations and a mild Federal Reserve. Goldman Sachs expects that if the jobs report is largely in line with consensus, the stock market will continue to rise because it will confirm the current market pricing, meaning that the worst growth results will be avoided and the Federal Reserve will be able to resume the interest rate cut cycle in September. Equity investors' positions remain in the neutral zone, indicating that there is room to increase exposure to equities. However, if the jobs report is too strong, it may limit the performance of the stock market, as investors' expectations for the Federal Reserve's easing policy recede. On the other hand, if the jobs report is extremely weak, it will test investors' ability to see through the recent weakness in economic growth and cause the market to reprice tail risks.