news

한어Русский языкEnglishFrançaisIndonesianSanskrit日本語DeutschPortuguêsΕλληνικάespañolItalianoSuomalainenLatina

July in the United StatesunemploymentThe rate unexpectedly rose to 4.3% from 4.1% last month, triggeringSamThe Sahm rule has triggered recession fears in the market. We believe that despite the weak performance of this employment report, the market may have overreacted. The rise in unemployment is partly caused by temporary weather factors, but also related to the return of young people to the labor market and the influx of immigrants pushing up the labor force participation rate, and does not fully reflect the decline in labor demand.

Although Sam's Law was triggered, this time it was special. The rebound of unemployment rate from the historical low was a process of normalization of the labor market, mainly due to the increase in labor supply rather than corporate layoffs, which made the unemployment rate rise slowly and did not show the typical "non-linear rise". In addition, the economic and total demand growth before Sam's Law was triggered this time was significantly better than the eve of recession in history, and there was no obvious negative impact on the economy, the real wage growth of residents was stable, and the bank's credit standards were not further tightened, so it does not necessarily indicate an imminent recession.

However, as labor market normalization progresses,FedIt will also start the process of normalizing monetary policy. Under the premise of cooling inflation, we expect the Fed to start cutting interest rates in September and cut interest rates twice this year. At present, the Fed does not need to make emergency cuts outside of regular meetings because economic conditions have not deteriorated to the extent that such actions have been taken historically. Too proactive interest rate cuts can easily cause panic and increase market volatility.

Short-term factors push up unemployment rate in July

The US unemployment rate unexpectedly rose to 4.3% in July from 4.1% in the previous month, but in-depth research found that the rise in unemployment was mainly due to a sharp increase in temporary layoffs, which may be caused to some extent by hurricanes. Data from the Department of Labor showed that the number of temporary layoffs in July increased by 249,000 to 1.062 million from the previous month. Estimates show that this contributed about 0.15 percentage points to the 0.2 percentage point increase in the unemployment rate (Figure 1). Temporary layoffs refer to people who temporarily leave their jobs but are told a clear return date or are expected to return to their original jobs within 6 months. This short-term unemployment phenomenon may have been affected by Hurricane Beryl in Texas in July. One evidence is that the number of people who "have jobs but cannot go to work due to extreme weather" in July surged to the highest level in the same period in history (Figure 2).

The number of permanent job losers related to layoffs has not increased significantly. Compared with temporary unemployment caused by weather factors, permanent unemployment caused by corporate layoffs is really worthy of attention. The latest data shows that the number of permanent unemployed in July increased by less than 40,000 from the previous month, which contributed little to the increase in the unemployment rate. In fact, since the unemployment rate rose from a low point in 2023, the growth of permanent unemployment has not been obvious. The real growth is the re-entry and new entrants to the labor market, that is, the unemployment caused by the increase in labor supply (Figure 3). The data from the Labor Department's Job Openings and Labor Turnover Survey (JOLTS) also show that the layoff rate of US companies is still significantly lower than the pre-epidemic level, indicating that companies have not laid off employees on a large scale (Figure 4). These data confirm our view in our previous report "Atypical Rise in Unemployment", that the increase in unemployment over the past year is more due to temporary and structural factors, rather than cyclical layoffs caused by deteriorating economic demand.

The rise in unemployment is also related to the increase in labor supply, reflecting the return of young people to the labor market and the influx of immigrants. The labor force participation rate rose to 62.7% in July from 62.6% in the previous month, among which the participation rate of young people aged 25-54 rose from 83.7% to 84.0% (Figure 5). This shows that the previous "Great Resignation" has basically subsided, and more and more young people, especially Generation Z and Millennials, are returning to work. At the same time, the number of foreign-born workers rose from 32.22 million in the previous month to 32.51 million in July, an increase of 290,000 (Figure 6). This is also consistent with our view in the report "Atypical Rise in Unemployment", that the relaxation of immigration policies by the Biden administration since the epidemic has led to a large number of immigrants flowing into the United States and transforming into the labor force.

How big is the impact of immigration on labor supply? According to the latest population forecast released by the Congressional Budget Office (CBO) in January 2024, the net number of immigrants may be 2.6 million in 2022, 3.3 million in 2023, and 3.3 million in 2024, all of which are much higher than the average annual level of 900,000 from 2010 to 2019[1]. The immigration forecast of the US Census Bureau is relatively conservative, 1.9 million in 2022 and 2.5 million in 2023. We take the average of these two estimates and get an average annual inflow of 2.56 million immigrants from 2022 to 2023. Subtracting the pre-pandemic trend of 900,000, we get an additional annual increase of 1.66 million immigrants, which is equivalent to 1% of the total US labor force. According to the San Francisco Federal Reserve, in order to fully absorb the increase in labor supply brought about by this part of the influx of immigrants and keep the unemployment rate stable, the number of new non-agricultural jobs per month needs to reach at least 230,000, which is higher than the average of 170,000 new jobs from May to July.

Theoretically, a positive labor supply shock (such as immigration inflow) will push up the natural unemployment rate, that is, the unemployment rate in equilibrium will also become higher. This means that the current rise in unemployment may be a transition from the old equilibrium point to the new equilibrium point, which has a lot to do with changes in supply-side factors, rather than being entirely caused by insufficient demand.

Chart 1: The rise in unemployment in July was mainly due to an increase in temporary unemployment

Source: Haver, CICC Research Department

Figure 2: The number of people who have jobs but cannot go to work due to extreme weather has increased sharply

Source: Haver, CICC Research Department

Chart 3: Permanent unemployment is not the main source of the rapid rise in unemployment

Note: The data shows the contribution of various factors to the increase in unemployment rate since January 2023. Affected by seasonal adjustment factors, the aggregate change is slightly different from the overall change.

Source: Haver, CICC Research Department

Figure 4: The layoff rate of enterprises is significantly lower than the pre-epidemic level

Source: Haver, CICC Research Department

Figure 5: Young people returning to the job market push up labor force participation rate

Source: Haver, CICC Research Department

Figure 6: Immigrant inflows have led to a surge in the number of foreign-born workers

Source: Haver, CICC Research Department

Sam's Law may not apply this time

Sahm's rule states that when the three-month average unemployment rate is 0.5 percentage points or more above the low point of the previous 12 months, it indicates that the economy is already in the early months of a recession. After the unemployment rate rose to 4.3% in July, Sahm's rule was triggered (Figure 7). However, we believe that this rise in unemployment is accompanied by many unconventional factors, and special circumstances also require special analysis.

First, the shortfall in labor demand after the pandemic has led to an ultra-low unemployment rate. The unemployment rate once dropped to a historic low of 3.4% in April 2023. When the unemployment rate rebounds by more than 0.5 percentage points from this extremely low level, it means that the labor market is recovering from an extreme environment. This is a normalization process, and rising unemployment is a normal phenomenon.

Secondly, unemployment caused by an increase in the labor supply may not lead to a shrinking demand. One important reason why "Sam's Law" works is that the rise in unemployment is mainly caused by layoffs in enterprises. Layoffs will lead to a decline in workers' income and reduced consumption, which will further lead to a decline in total demand, triggering more layoffs and unemployment. In other words, layoffs will produce a "multiplier effect", leading to a vicious cycle, resulting in a "non-linear rise" in the unemployment rate.

However, as mentioned above, the rise in unemployment this time is closely related to the increase in labor supply. Unlike layoffs, this unemployment pattern may not lead to a significant reduction in consumption and a shrinking demand. On the contrary, the increase in labor supply may also create new demand, which will push up the potential growth rate of the economy in the long run. We compared the trajectory of this rise in unemployment with the rapid rise in unemployment in history and found that the rate of increase in unemployment this time was significantly slower (Figure 8). This shows that the rise in unemployment was not accompanied by a shrinking of total economic demand, and therefore did not show the characteristics of "non-linear rise".

Chart 7: Rising unemployment triggers “Sam’s Law”…

Source: Haver, CICC Research Department

Chart 8: …but this time unemployment is rising much more slowly

Note: The years of rising unemployment identified are 1953, 1957, 1970, 1973, 1980, 1990, 2001 and 2007. The specific method of identifying the rising unemployment period is to first find the period in which the unemployment rate rose by at least 0.5% within 12 months, and then set the lowest point of unemployment before all the rising unemployment periods since 1950 (excluding COVID-19) as 0 months after the unemployment rate began to trough as the low point before this rise.

Source: Wind, CICC Research Department

Third, the economic and aggregate demand growth before the triggering of Sam's Law this time was significantly better than the eve of the recession in history. Employment growth is the result of economic operation, and its cause comes from economic growth and aggregate demand expansion. We compared the performance of the US economy this time with that before the triggering of Sam's Law in history, and found that the situation this time is significantly better than similar stages in history. In the first half of 2024 (i.e., the two quarters before the triggering of Sam's Law), the actualGDPThe average quarter-on-quarter annualized rate was 2.0%, and the average quarter-on-quarter annualized rate of the indicator measuring total demand - final sales to the domestic private sector - was 2.5%, both of which were not lower than the potential economic growth rate of 2.0%. In the two quarters before the triggering of Sam's Law in history, the growth rates of real GDP and final sales to the domestic private sector were significantly lower than the potential growth rate at that time (Figure 9). In other words, the US economy had already shown obvious signs of decline before the triggering of Sam's Law in history, but there was no similar phenomenon this time. In addition, there has been no obvious negative impact on the US economy since the beginning of this year, and the actual wage income of workers has grown steadily (Figure 10), and the credit standards of the banking sector have not been further tightened (Figure 11). In this case, we believe that even if Sam's Law is triggered, it may not necessarily indicate that a recession is coming.

Figure 9: Comparison of economic and aggregate demand growth before Sam's Law was triggered

Note: Data as of the second quarter of 2024

Source: Haver, CICC Research Department

Figure 10: Workers’ real wage income grew steadily

Source: Haver, CICC Research Department

Chart 11: Fed survey shows no further tightening of bank lending standards

Source: Haver, CICC Research Department

Rate cuts are coming, but not urgent

As the labor market normalizes, and inflation cools, we expect the Fed to cut rates by 25 basis points in September and December. The Fed’s monetary policy statement at its July 31 meeting said it was “attentive to the risks to both sides of its dual mandate,” suggesting that in addition to inflation data, the Fed is also paying close attention to changes in the labor market. On August 5, San Francisco Fed President Mary Daly pushed back against the view that weaker-than-expected July employment data meant the economy was in recession, but she also warned that the Fed would need to cut rates to avoid that outcome. Given the progress in labor market normalization and the Fed’s focus on employment risks, we think there is a high probability of a September rate cut of 25 basis points, or a 50 basis point cut if economic or inflation data slows more than expected.

At present, the Fed does not need to make an emergency rate cut outside of regular meetings, because the economic situation has not deteriorated to the extent that such actions have been taken in history. We have sorted out the background of the Fed's five emergency rate cuts since 1980 and found that emergency rate cuts were either due to a sharp increase in financial risks, such as the "Black Monday" of the US stock market in 1987, the collapse of Long-Term Capital Management (LTCM) in 1998, the eve of the global financial crisis in 2007, and the outbreak of the new crown epidemic in 2020; or because the economic outlook has deteriorated significantly, such as the bursting of the Internet bubble in 2001. In these special periods, the Fed, as a central bank, stepped in to "cover the bottom" and exercised its responsibility to stabilize the economy and financial markets (Figure 12).

At present, we have neither seen a significant increase in financial risks nor signs of a significant deterioration in the economy, so we judge that the Fed will not consider an emergency rate cut for the time being. In fact, too proactive rate cuts will exacerbate market volatility. This is because there is information asymmetry between the central bank and the market. The market is unclear about why the central bank suddenly cuts interest rates, which may cause market panic. Therefore, the Fed should provide clear guidance to the market during the rate cut process to avoid sending wrong signals and reduce policy uncertainty.

Figure 12: Historical background of unexpected Fed rate cuts or emergency responses

Source: Federal Reserve, Bloomberg, CICC Research Department

Dr. Zhengning Liu also contributed to this article.