Unemployment is now at its highest since 2021, driven by corporate cost-cutting. Fed rate cuts might revive the job market, but experts caution: don’t hold your breath.
Following a pandemic-fueled hiring spree, labor conditions are now cooling off. This past week brought a trifecta of bad news for U.S. workers.
In just two days, jobless claims hit their highest in nearly a year, July payrolls fell short by 61,000 jobs, and unemployment unexpectedly jumped to 4.3%. This surge hints at a looming recession.
These developments have flipped expectations for Fed rate cuts. Just days ago, a 25-basis-point cut was anticipated for the September Fed meeting. Now, many investors are betting on a 50-basis-point cut, with some expecting an even faster reduction.
But, the relief might take time. Oliver Allen, a senior U.S. economist at Pantheon Macroeconomics, warns that unemployment might rise further before any improvement. “Higher borrowing costs have dampened hiring over the past year,” Allen told Business Insider. The Fed’s aggressive rate hikes aimed at curbing inflation have also driven up business debt costs, slashing profit margins.
“We’ve seen significant margin pressure on wholesalers, retailers, and manufacturers,” Allen noted. “In the short term, cutting hiring and potential layoffs are their go-to moves to manage costs.”
Indeed, S&P 500 firms saw net profit margins drop to a three-year low by the end of 2023, per FactSet. Around the same time, job cut announcements soared by 136%, according to Challenger, Gray & Christmas.
Fed cuts could ease borrowing costs, lifting some pressure off businesses to reduce workforce numbers. However, there’s a hitch: the Fed’s next meeting isn’t until September, and even then, the effects of any cuts will be slow to materialize.
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