The latest US job market report showed a rise in the unemployment rate to 4.3% in July, marking its highest level since early 2022 and triggering concerns in financial markets that a tapering-off of employment presaged a wider downturn, perhaps even one ending in recession.
News of a cooling labour market came after recent data showed the US manufacturing sector contracting for four months in a row.
However, we believe concerns about rising unemployment indicating the US economy is in a slump are overblown and that investors should not jump to conclusions based on a few data releases.
This is because the increase in the unemployment rate was driven by a rising supply of labour (thanks to a higher participation rate and strong immigration in 2022 and 2023). It is not the case that demand for labour is falling, which could signal an upcoming recession. While the recovery in manufacturing appears to have peaked, activity has not slowed to a level that would suggest a recession was imminent.
Many investors had been counting on a soft landing of the US economy. They may now have to factor in an alternative scenario. We will be monitoring upcoming data and comments in company earnings reports for signs of weakness in demand.
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