Unemployment may have to rise sharply as the US Federal Reserve tries to slow the economy and choke off soaring inflation
Unemployment may have to rise sharply as the US Federal Reserve tries to slow the economy and choke off soaring inflation

Wall Street will get another chance this week to figure out the state of the labor market.

The Bureau of Labor Statistics will release the July nonfarm payrolls report on Friday. It’s a monthly survey based on questionnaires sent to business establishments around the U.S. to determine the net number of jobs the private sector created each month. Private job creation is critical for every economy, as it is the source of income growth and consumer spending that drive GDP growth.

According to two forecasts from Trading Economics, markets expect the economy to have generated somewhere between 250,000 and 290,000 jobs in July. That’s well below the 372,000 jobs the economy generated in June.

Dan North, a senior economist at trade credit insurer Allianz Trade North America, sees the economy creating 250,000, with the unemployment rate remaining at 3.6%.

“That would normally be a very strong report, but there are signs underneath the surface that show cracks developing in the labor market,” North told the International Business Times in an email.

“First, the unemployment rate is almost useless since it does not consider everyone who is not participating in the labor force. Worse than that, it is a lagging indicator. It tells us what has already happened. Job growth is a coincident indicator at best, so it tells us about what is happening now. And note that this labor market has created no jobs since March 2020. It has only regained jobs. The tough part of creating jobs is coming up, and it will be tough," North said.

Still, there’s a long list of companies that have been announcing significant job cuts like Ford (8,000 jobs), Loan Depot (2,000 jobs) and Coinbase (1,100 jobs). And there’s another long list of companies reporting hiring freezes — Alphabet, Amazon, and Meta to name a few — meaning that forecasters may be overly optimistic in their job projections for July.

If that turns out to be the case, and job growth is stagnant or even negative, it will be another indicator that the U.S. is already in recession.

The GDP dropped for the second quarter in a row, indicating that the economy is already in recession in a narrow sense.

But that may not necessarily be bad news for Wall Street, as a recession is usually the best remedy for inflation, which has been the dominant economic evil these days, crushing family budgets and hurting sales of companies that sell discretionary items.

The problem is that this remedy may end up being worse than the evil it helps kill. For many Americans, facing a situation without a paycheck is far worse than a situation where the paycheck buys less.