Summary : As soon as the report was live, economists were out with their commentaries and while many celebrated the outsized number, there was also the worry this would mean an even more aggressive stance by the Fed that could still choke off the economy and bring on a recession.
“Markets are having trouble digesting the implications of the strong labor market in July. The dynamics driving inflation also have little in common with past inflation cycles.”
There will be yet another chance for the experts to weigh in on Wednesday, when the government reports the consumer price index for July. “The rate is 1.24 million b/d lower than last year and is in line with demand at the end of July 2020, when COVID-19 restrictions were in place and fewer drivers hit the road.”
While Fed Chairman Jerome Powell said last month the central bank would take into account all the incoming data before hiking rates further, he also indicated that another 75 basis point hike would not be out of the question at the Fed’s next meeting in September.
“And yet, we continue to rely on forecasting models that cannot possibly incorporate such historic and permanent changes,” he added.
This would be the first real test of the Federal Reserve’s anti-inflation monetary policy, following back-to-back 75 basis point hikes in interest rates designed to slow the economy by crimping demand and cooling off the labor market. Already, the second quarter gross domestic product had recorded a second consecutive contraction in output, a common though unofficial measure of a recession.
Estimates centered on a 250,000 monthly increase in jobs, with one Wall Street firm even suggesting the number would be 75,000. The actual number: 528,000 new jobs, restoring the economy to its pre-pandemic levels and driving the unemployment rate down to 3.5%, the same rate it was prior to the declaration of coronavirus as a global health emergency.But no good deed goes unpunished. As soon as the report was live, economists were out with their commentaries and while many celebrated the outsized number, there was also the worry this would mean an even more aggressive stance by the Fed that could still choke off the economy and bring on a recession.“Markets are having trouble digesting the implications of the strong labor market in July. The big headline gain in jobs was a surprise and could convince people like San Francisco Fed President Mary Daly that the economy needs another 75 basis point hike at the Fed’s next meeting. All eyes are now on inflation.”
That is what is proving so confounding about the current economy and its recovery from a once-in-a-century pandemic. Experts misjudged how strongly it would come back following the sharpest and shortest quarterly downturn on record. And now they may be misjudging how it will handle the downshift to a more normal growth rate – and how resilient the job market will be going into the second half of the year and beyond.“On the one hand, the exogenous events of the last near three years have fundamentally reshaped the structure of the US and international economy,” Bernard Baumohl, chief global economist at the Economic Outlook Group, said. “This is not your typical business cycle. Nor is it not your typical employment pattern. The dynamics driving inflation also have little in common with past inflation cycles.”There will be yet another chance for the experts to weigh in on Wednesday, when the government reports the consumer price index for July. With inflation surprising to the upside in June, notching a 1.3% monthly gain that brings the annual rate to 9.1%, economists are looking for a downshift from June’s 1.3% increase to 0.2% in July. That would bring the overall CPI to a 8.7% level.But anything is possible. There have been some promising signs of a slowdown in prices, the most notable among them being the cost of a gallon of gas. Prices for a gallon of regular have fallen 68 cents in the past month to a national average of 4.069. That is still roughly a dollar above where they were a year ago, but it is a meaningful drop – and one that has the Biden administration cheering.“According to new data from the Energy Information Administration (EIA), gas demand dropped from 9.25 million b/d to 8.54 million b/d last week,” AAA said on Thursday. “The rate is 1.24 million b/d lower than last year and is in line with demand at the end of July 2020, when COVID-19 restrictions were in place and fewer drivers hit the road.”The decline in the price of energy, a key component in many items ranging from gasoline to agricultural fertilizers, would have a ripple effect throughout the economy and help bring inflation under control. But strong demand for labor could keep pressuring wages, another key factor in overall inflation.While Fed Chairman Jerome Powell said last month the central bank would take into account all the incoming data before hiking rates further, he also indicated that another 75 basis point hike would not be out of the question at the Fed’s next meeting in September.“And yet, we continue to rely on forecasting models that cannot possibly incorporate such historic and permanent changes,” he added. “The Federal Reserve and many private economists appear shackled to an economic paradigm that no longer exists. The result: too many economic forecasters increasingly find themselves one equation behind with what is happening in the real world.”
