How bad was last week's non-farm payroll report?

On the surface, the seemingly poor U.S. July non-farm payroll data reveals a more complex picture of the American economy upon deeper analysis.

The Financial Times commented that the employment report released last Friday initially shocked the market. However, the core of this report is that it prompts the market to reassess whether the U.S. economy is undergoing a healthy adjustment back to normalcy post-pandemic or if it is a precursor to recession.

Although the reduction in government jobs is part of the reason for the slowdown in employment data, the more critical signal is that employment growth in industries highly sensitive to the economic cycle has almost completely stalled.

This series of data makes the view within the Federal Reserve advocating for interest rate cuts appear more prescient and alters market expectations regarding the direction of monetary policy. Investors are closely monitoring corporate earnings, particularly the performance divergence across different industries, to gauge the true health of the economy and its future trajectory.

Stagnation in Cyclical Industry Employment is More Concerning

Analysis suggests that a key component of the slowdown in employment data is the reduction of jobs in federal, state, and local governments. Data shows that in the past six months, the number of new jobs added to the U.S. economy was only half of that in the previous six months. Of this decline, as much as 40% can be attributed to reduced hiring in government sectors.

Specifically, while job creation in the private sector has also significantly slowed, especially with poor performance in June, if the decline in government hiring were excluded, the discussion around this employment report would not be as tense.

A more noteworthy signal in the employment data is that employment in cyclical industries has almost completely stopped adding new employees. This trend can be traced back to the beginning of this year, and the July report merely reaffirms this troubling situation.

These industries, which are highly sensitive to economic cycles, are key indicators of economic health. This report itself did not change this picture and even reinforced market concerns that the potential momentum of the economy is weakening. Compared to one-off fluctuations in government hiring, the sustained weakness in cyclical industries better reflects the endogenous growth pressures within the economy.

Economic Slowdown or Return to Normalcy?

In light of the latest employment data, investors face a core question: Is the U.S. economy experiencing a cyclical slowdown, or is it a normalization cooling off from the irrational boom post-pandemic? Different answers to this question will lead to starkly different market judgments.

On one hand, the absolute level of unemployment remains at historical lows, comparable to the economic boom periods of the late 1990s and the mid-2000s. From this perspective, the current slowdown can be interpreted as a healthy adjustment back to a sustainable normal.

On the other hand, the direction of change in the unemployment rate is concerning. Historical experience shows that once the unemployment rate begins to rise rapidly, this trend often continues, as seen in 2000 and 2008. If the focus is placed on the rate of change, then concerns about the risk of economic recession should intensify Analysis suggests that to determine which interpretation is closer to reality, corporate profitability is a key reference. Don Rissmiller of Strategas pointed out that unless corporate profits decline, it is difficult for the U.S. economy to fall into recession. According to FactSet, the current earnings growth rate of S&P 500 constituents has reached 10% (with two-thirds of companies having reported earnings), which supports a "normalization" benign interpretation.

However, behind the overall earnings growth lies significant industry divergence. Analysis shows that profits in the technology sector (benefiting from the AI boom) and the financial sector (benefiting from high interest rates, rising asset prices, and high volatility) are growing rapidly. But in other sectors such as consumer goods and materials, earnings growth is clearly slowing. This divergence coincides with weak employment data in cyclical industries, revealing that the U.S. economy is not experiencing broad prosperity but rather exhibiting structural unevenness