The U.S. labor market has been slowing down for months. With borrowing costs still at their post-financial crisis peak, markets have been looking favorably on monthly employment reports that resemble a branch-ripened peach: A little soft is perfect. That’s starting to change. The strains caused by higher interest rates are becoming more visible. The number of open positions has fallen steadily over the last two years. Jobless claims spiked to an 11-month high last week. Layoffs remain muted, but fewer people are leaving their positions to look for a new job. Stocks tanked on Thursday on weak employment and manufacturing data. “All of the main signals that I would look at tend to be pointing in the same direction,” Bharat Ramamurti, a former deputy director of the National Economic Council, told MM. “You're seeing a weakening of the job market.” That’s why Ramamurti, along with other allies of Vice President Kamala Harris, had urged Federal Reserve policymakers to lower interest rates at their meeting earlier this week. The strength of the job market remained a bright spot even when inflation was at its highest two years ago. If unemployment continues to tick upward, it will challenge Harris’s case that her administration was an effective steward of the economy. It will also elevate arguments that the Fed has waited too long to cut rates. “I think that they're playing catch up,” Ramamurti said. “The idea of a 50 basis point cut in September needs to be actively under consideration.” The Labor Department will provide an update on both the unemployment rate and monthly job totals for July at 8:30 a.m. The consensus estimate is that the economy added 185,000 positions – a steady increase, albeit below the 220,000 averaged over the previous 12 months ending in June — and for the unemployment rate to remain flat at 4.1 percent. That’s low, by historical standards. But it’s been climbing at a pace that could soon trigger what’s known as the Sahm Rule, which historically means the economy is in a recession. (The rule holds that the economy is facing a recession when the three-month average jobless rate increases by a half-percentage point above its lowest level in the past 12 months. The U.S. is close to that now.) “I feel confident that we are not in a recession,” Claudia Sahm, the former Fed economist who came up with the eponymous rule, told MM. The labor market has provided an economic bulwark against some of the downward pressure created by higher interest rates, she added. It’s possible that the rising unemployment rate might be due to new immigrants entering the workforce — which could help the economy expand. But at a more basic level, “we're headed in the wrong direction,” she said. “Unemployment has been rising — and rising gradually. It has been rising for over a year now. This is not a one-month kind of a pop.” Fed Chair Jerome Powell said on Wednesday that the incoming data reflects a job market that’s moving “from overheated conditions to more normal conditions.” He later pointed out that the economy’s performance has flouted other signs that typically point to a recession. That includes the inverted U.S. Treasury yield curve, which refers to when investors receive less interest on long-term than short-term bonds “If we start to see something that looks to be more than that, then we're well positioned to respond,” he said. IT’S FRIDAY — Your host is off today and is clearly thinking about his grocery list. Send tips and suggestions to ssutton@politico.com.
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