The labor market took a turn this week after August kicked off with a government jobs report that came back well-below expectations. The jobs report included a downward revision of prior months’ totals by 258,000 and an increase in the unemployment rate. This week’s continuing jobless claims were reported at their highest level since November 2021. Last week’s Challenger Job Cuts report showed a 139% increase in YoY expectations for cuts in August. 

Last week’s jobs report was the missing puzzle piece companies and traders have been waiting for all year. Sarah House, senior economist at Wells Fargo, commented, “The U.S. economy is struggling to maintain its footing...businesses and consumers have been facing a whirlwind of economic policy changes, elevated inflation and monetary policy that remains somewhat restrictive. The loss of momentum feared by this mix is unfortunately beginning to bear out.” To recap, the labor market is not as strong as Jerome Powell posited last week, inflation is creeping back up, the housing market just had its worst spring selling season in 13 years, all while mortgage and auto loan delinquencies are steadily climbing. The FOMC’s dual mandate of stable prices and full employment are moving in opposite directions – higher inflation implies the need for higher rates while poor employment data supports a reduction in rates. 

A New York Fed survey released on Tuesday this week highlighted the continuing credit strain on consumers with aggregate consumer debt rising $185 billion in the second quarter to $18.4 trillion. The report stated that of all U.S. consumer debt, approximately 3% of accounts are at least 90-days delinquent with the largest component of that being student loans. Over ten percent of the $1.64 trillion student loan sector is at least 90-days delinquent. The report notes FHA mortgages, which are popular with younger home buyers, “have recently seen the steepest rise in delinquency rates, with transitions into 30 days past due exceeding 4% quarterly,” Notably, delinquencies have a heavy concentration in southern states. The concurrent slowdown in the labor market, struggling consumers and potentially higher prices from tariffs are beginning to point to a stagflation scenario. There is still a possibility of avoiding an economic downturn, however evidence to the contrary is growing on a weekly basis. 

KEY INDICATORS THIS WEEK

ISM Services data- Added to the gloomy economic outlook with a headline figure weaker than expected, employment is at its lowest level since March and prices paid at the highest level since October 2022. 

Next week- CPI, PPI and retail sales.