On Friday, the July jobs report was released, and job gains smashed expectations, which is great…or is it?
The Wall Street Journal reported, “The economy added 528,000 jobs in July, returning payrolls to their prepandemic level. The jobless rate dropped to 3.5%. In the WSJ survey, economists had estimated 258,000 jobs and a 3.6% unemployment rate.”
And according to CNBC, “the July gains were the best since February and well ahead of the 388,000 average jobs rise over the past four months. The BLS release noted that total nonfarm payroll employment has increased by 22 million since the April 2020 low when most of the U.S. economy shut down to deal with the Covid pandemic.”
Surely, this must be a good thing you might be saying to yourself. The American economy added 528,000 jobs and wages increased 5.2% from the same month a year ago. What is wrong with that?
Well, Wall Street wasn’t as pumped about this as one might expect, and that pessimism was reflected in market returns which were negative most of the day.
As usual concerns about Fed policy were the culprit for the initial feelings of gloom. With inflation already high, investors are now predicting that higher wages will contribute to more inflation thus causing the Federal Reserve to raise interest rates higher to keep the economy from overheating.
However, an optimist could make the case that these job numbers are good for the Fed because a strong labor market gives them more room to continue to raise interest rates without significantly increasing unemployment.
The Fed also has the advantage of waiting until September to meet again which gives them the opportunity to view two more inflation reports and one more employment report before deciding how high to raise interest rates.
So, they got that going for them…which is nice.
