The problems in the July jobs report are bigger than one report

The July jobs report was not good. Not catastrophic, but not good. That has implications for the Fed and interest rates, the economy, and ultimately the credit markets. And that, of course, has implications for banks.

It wasn't just that the headline number – a loss of 23,000 jobs – was below the consensus estimate of a gain of 80,000 jobs. In a  work force of almost 170 million people, that's a rounding error. And one month can always be an outlier. But it was the revisions to the two most recent months, and the trendline now being drawn, that's more concerning. June is now estimated to have seen only 20,000 jobs created  (down from 57,000), and May 63,000 (from 129,000). If you draw a line from those numbers, it's not too hard to see which direction they are headed. It's not up.

Yes, the unemployment rate fell, but not for a good reason. The labor force participation rate, which measures the percentage of all Americans who are in the work force, employed or not, fell to a low not seen since the 1970s (excluding the pandemic). Whatever the reasons for that drop – one explanation I saw was that a lot of people 55 and over are leaving the work force for good – the bottom line is that there are fewer people contributing to economic growth. That's one problem.

Another is that the economic landscape right now is particularly fraught. If you were a central bank with an itch to lower interest rates, falling employment is as good an excuse as you can want. But this Fed finds itself in something of a bind. Inflation remains well above the Fed's target rate of 2%, as our Kyle Campbell wrote. Even the Fed expects inflation above 3% over the next year. Cutting rates won't actually help pull it down, since the goal of cutting rates is to boost economic activity which, normally,  pushes inflation up. The next consumer-price index report comes on Wednesday. It will be closely watched. 

Then there is the bond market itself, which is exhibiting some unusual dynamics. First off, the yield on the 30-year Treasury bond is 5.2%; it has not been that high since before the Crash of 2008. That's not a good sign. Then there is Japan. Last week the Treasury bought billions worth of yen to prop up the currency. At least part of that move was very likely to prevent the Japanese from having to do that work on their own, because they'd likely be selling U.S. bonds to raise the money to do it. That would put even more pressure on U.S. interest rates, and while that is a direct problem for the government – it makes selling U.S. debt more expensive – it would have  an effect across the capital markets, and would make the Fed's job even harder. 

The real question with all this is whether the bond market is even listening to the Fed anymore, which is after all kind of what Kevin Warsh wants. But that can be a very sharp blade to try and balance oneself upon. The last thing the central bank can afford is to lose its power to jawbone the market. The Fed, after all, really has direct control over only one specific part of the market, which is the interest rate it pays on overnight funds parked at the Fed. 

So far, none of this has really had a big effect on the consumer credit market. Total consumer loans have grown about 7% compared to a year ago, according to JPMorganChase. However, the outlook for credit is dimming, as our Allissa Kline reported last week. The outlook for business conditions deteriorated in the second quarter, according to the American Financial Services Association. Lenders reported seeing a decline in loan performance, and expect the trend to worsen in the second quarter. And that survey was conducted and published well before Friday's jobs report hit the tape.

I've said this before: everything is subordinate to the credit market. The credit market is the real driver of economic growth. Nobody builds a business or puts a new addition on their house with cash. They take out loans. If loan growth remains strong, I think the short-term stuff is mostly noise. But the credit market, of course, is dependent upon a strong consumer who is out there spending. If consumers aren't spending and businesses are expanding to a sufficient degree, that's when the cycle turns down. We're not there yet, but we're probably a bit closer than anybody thought we were before Friday.