By DNCA Finance

Since 2012, American Aries Merrit has held the 110-meter hurdle world record.

Like a front-runner hurtling towards the obstacle course, the job market in the world’s leading economy is the focus of attention. With every swing, the tension in the international audience is total.

Leap after leap, job creation in the private sector (excluding agriculture, which is more volatile) managed to break through the 100,000 mark. But finally, the runner stumbles in July: last month’s figures are revised below the fateful threshold. And failing to cushion the blow, the first estimate for August fell short of expectations.

Despite the stability of the unemployment rate (at 4.2%), the signals have been deteriorating for several weeks: a fall in job openings, a rebound in layoffs, a pick-up in weekly jobless registrations, the geographical and sectoral spread of the slowdown to pre-recession levels: the US job market is most likely showing signs of running out of steam. The FED’s “Beige Book” confirms that activity is stagnating or deteriorating in a growing number of districts.

The job market is key. Just as the FED seeks to lower inflation expectations during periods of overheating, so household disposable income expectations in relation to unemployment dynamics are paramount. A deterioration in employment, even if moderate, tends to create an anxiety-inducing expectation among households that their disposable income (income from which essential consumption and taxes are deducted) will fall. Typically, this anticipation leads households to increase their precautionary savings, cutting back on discretionary consumer spending while becoming more price-sensitive in their everyday purchases, as evidenced by the results or business objectives of a growing number of US companies exposed to the consumer. Falling consumption reduces demand for goods, then production, commercial transactions and hence the demand for money and its velocity. We may thus reach a stage where the constraints imposed by the FED on the money supply in order to target interest rates that have helped curb inflation are now reaching a dangerous level of mismatch with the (lower) rate that could once again interest consumers in redirecting their disposable income from savings to consumption… Should this mismatch persist, the FED would be“behind the curve“, and the vicious circle of recession could quickly be set in motion.

This risk seems low, given that the unemployment rate remains close to 4%. The inertia of the job-creation machine remains positive. And if GDP grows in the second quarter with slightly fewer new jobs than expected, this is good news for productivity gains. In addition, the stock of savings (equities, real estate – due to limited supply -) tends to support households’ ability to consume, perhaps explaining (along with the slowdown in inflation) the rebound in their confidence. Above all, the FED’s message was clear at Jackson Hole. With the urgency of fighting inflation behind it, the FED can now turn its attention to its mandate of sustainable employment “maximization”. There is nothing in these figures to suggest that Jerome Powell has lost his grip on monetary policy: he is not behind the times. This is probably the most reassuring element for the markets, for whom the only unknown factor on September 18 seems to be the coefficient (expected rate change between 25 and 50 basis points) of the Fed’s reaction function. The US economy has missed a leap, but its race is not over for all that…