Why Today's Disappointing Jobs Report is Welcome News

Obvious signs of a slowdown can help push the economy to being more affordable relatively quickly

According to the Bureau of Labor Statistics, July had job growth of 114,000, and the Unemployment Rate jumped up to 4.3%, from 4.1%, both of these were worse than expected by economists. In most times, this would be considered a disappointment and cause for concern. In any time, one month’s report shouldn’t qualify as an absolute indicator of what will soon follow. You’d have to see two or three reports at least to consider something a trend.

We are in one of the most unique economies in history. The macroeconomic data suggests we are in an economic boom. Jobs have grown substantially for 3 years, while unemployment had been at significant lows for an historically sustained period of time. GDP has been strong for years, the most recent reading being surprisingly strong, and we are leading the world in economic growth after the pandemic.

But despite all of this, consumer economic sentiment has stayed depressed, and has been the worst in history as far as length of time in historically low territory.

As you can see in the above graph, the recent trend is upward, but it’s been a rocky road, and positive sentiment hasn’t gained strong traction. Why is this?

In short, inflation. Even though inflation has cooled significantly throughout the past two years, it did spike in 2022 to almost double digits at 8-9%. This was the highest inflation reading since the ridiculous numbers back in the late 1970’s and early 1980’s during the Stagflation era (combination of high unemployment and high inflation).

Even though the inflation data has shown major progress in easing consumer prices, prices remain high enough that people are not happy. Housing has been a big issue, as high prices combined with high interest rates have caused an affordability crisis. Many other common household expenditures also shot up during the inflation spike, and, while they have stabilized, they haven’t come back down, much to the consumer’s chagrin.

The problem with high inflation is that the textbook way to deal with it, regardless of the cause, is to slow the economy down by raising interest rates. By making borrowing more expensive, you slow economic activity, which slows demand, which (hopefully) causes prices to go down, or at least stabilize. The Federal Reserve (The Fed) is responsible for this mandate, as they set the market expectations for interest rates with manipulation of the baseline rates that banks offer when they lend to one another.

Sticky (inflation) fingers

One of the more frustrating aspects over the past several months is that, while the Fed has raised the baseline rates to historically high levels, inflation has stayed a bit “sticky”, as the economic commentators say. After initially plummeting from its high in 2022, inflation has been in the 3-4% range for over a year, reaching 3.3% in May (the most recent month’s data available). It’s likely to continue dropping, but it’s still a long way from the 2% target that is accepted as the Fed’s mandate, and is indicative of an ideal inflationary environment. 3.3% is actually an historically low inflation number, but recent decades have spoiled all of us as it is among some of the highest readings during recent times.

So inflation remains a problem, even if mostly psychologically at this point. People don’t feel great about the national economy, despite mostly feeling great about their own personal economies.

Because of this inflation “stickiness”, today’s report suggesting a slowdown underway is welcome news. This is because it will likely prompt rates to go down. The Fed has been hinting for months that it’s ready to pull the trigger on lowering rates if the data continues to suggest they should. After months of higher-than-expected jobs reports, today’s being lower than expected should be the data they need to do so.

Markets’ Immediate Reactions

The markets have reacted accordingly to today’s report in two key areas: US Treasury Bonds and oil prices.

US Treasury Bonds have yields, or a rate of return in other words, that are benchmarks for interest rates in general. They are traded in financial markets daily so they fluctuate in the same manner that stock prices fluctuate. The 10-year Bond is considered a key benchmark, and its yield has been in the mid-4%’s for many months now.

Well, in response to today’s news, the 10-year Bond’s yield has plummeted to well below 4%, a level it hasn’t seen since February.

This is likely the beginning of what should be a consistent pattern of lower yields—and hence lower rates—across the financial markets, which will make borrowing of all kinds cheaper for everyone. Considering that housing is in an affordability crisis, the resulting lowering of mortgage interest rates will be welcome relief.

The low jobs reports numbers also affect other aspects of an everyday consumer’s life, gas prices being one of the most significant. When jobs numbers are low, an economic slowdown is anticipated, which causes an expectation that demand for gas will go down. This means that investors that trade in oil no longer want to hold onto oil because they don’t expect prices to go up in this environment. Therefore, oil prices should go down, causing gas prices to also go down.

As can be seen below, oil prices have responded to the jobs report accordingly.

The expectation that the economy is slowing should continue to push oil and gas prices lower. Gas prices can also affect other aspect of the economy since shipping of most goods requires gasoline. Lower prices across the board of many household products, including groceries, may result as companies can remain profitable if their shipping costs go down and they lower prices to correspond to that.

This, combined with the lower interest rates as described earlier, will make life in general more affordable to average Americans, and should create higher economic sentiment.

The Fed has been waiting for data like this, as have investors across the globe. While we don’t actually want a painful recession to happen, a slowdown is helpful to some degree for all of these reasons. You don’t want an economy to be too “hot”, especially in an era of higher inflation.

If the data continues similarly over the next few months, we may get to the target 2% inflation number and general economic happiness and hopefulness relatively quickly.

Political Implications

For those worried about the impact this may have on the upcoming election, this news is something that Kamala Harris and other Democrats can capitalize on.

For one thing, job growth has been so strong for so long, it was going to be difficult for that to be sustained forever. And if it was, it would have been potentially bad for affordability complaints. For years, Republicans have been pounding the table on inflation and how that’s been the biggest failure of the Biden Administration and Democratic governance.

With affordability suddenly rearing its head through lower rates and lower gas prices, both of which can be almost immediately seen and felt throughout the country, Democrats can emphasize the newfound easing on Americans’ wallets that is underway. And the timing is such that Americans will feel this right as election season heats up, which should increase positive sentiments for the incumbents.

A few months ago, I wrote about a potential economic “sweet spot” being on the horizon that would benefit Joe Biden. This can be applied to Harris now. The “sweet spot” seems to be finally sweetening up.