By Lucia Mutikani
WASHINGTON (Reuters) – The U.S. economy added fewer jobs than expected in July, but solid wage gains and a decline in the unemployment rate back to 3.5% pointed to continued tightness in labor market conditions.
The Labor Department’s employment report on Friday also showed job gains in May and June were revised lower, potentially suggesting demand for labor was slowing in the wake of the Federal Reserve’s hefty interest rate hikes.
But with 1.6 job openings for every unemployed person in June, the moderation in hiring may also be the result of companies failing to find workers.
The mixed report did not change growing perceptions among economists that the Fed could engineer a “soft landing” for the economy, though much would depend on the direction of inflation after annual increases in prices slowed sharply in June.
“There are many signs that we’re on the path to a ‘soft landing,’ but that path can also lead us to a sustained downturn if we miss the exit to a sustainable and strong labor market,” said Nick Bunker, head of economic research at the Indeed Hiring Lab. “We haven’t approached that fork in the road yet, but there is still a strong possibility that the labor market can rebalance without a recession.”Â
Nonfarm payrolls increased by 187,000 jobs last month, the Labor Department’s survey of establishments showed. Data for June was revised lower to show 185,000 jobs added instead of the previously reported 209,000. The job growth in June was the slowest since December 2020.
The economy created 49,000 fewer jobs in May and June than previously reported. Economists polled by Reuters had forecast a gain of 200,000 jobs. Payrolls growth has averaged 218,000 jobs per month over the past three months, a sharp slowdown from the average of 434,000 during the same period last year.
The average workweek fell to 34.3 hours, the second shortest since the initial wave of the COVID-19 pandemic more than three years ago, from 34.4 hours in June. Aggregate hours worked across the private sector dropped, reversing some of June’s rise. The shorter workweek and slowdown in payrolls gains likely reflected the end of pandemic labor shortages in most sectors and high-profile layoffs in the technology area and industries sensitive to interest rates earlier this year.
“The combination of tight labor supply and waning labor demand has slowed job growth to a more typical rate consistent with moderate economic expansion as seen in the years before the pandemic,” said Chris Low, chief economist at FHN Financial in New York.
The economy needs to create roughly 100,000 jobs per month to keep up with growth in the working-age population. There was no indication that a heat wave, which blanketed large swathes of the country in July, had impacted job growth.
Employment gains last month were led by the healthcare sector, where payrolls increased by 63,000. Financial activities payrolls rose by 19,000. The construction sector boosted headcount by 19,000, driven by hiring of residential specialty trade contractors and nonresidential building construction.
The leisure and hospitality sector added 17,000 jobs. Hiring in that area has decelerated from an average of 67,000 jobs per month in the first quarter, likely as the higher cost of living forces people to cut back on discretionary spending.
Employment in leisure and hospitality remains below its pre-pandemic levels by 352,000 jobs. Other industries have recouped all the jobs lost during the pandemic.
Professional and business services employment decreased by 8,000 jobs, with temporary help services, a harbinger for future hiring, dropping by about 22,000 jobs. Temporary help employment is down by 205,000 jobs per month since its peak in March 2022.
Manufacturing shed 2,000 jobs, with auto assembly plants and nondurable manufacturing accounting for the decline. The information industry continued to lose jobs.
Government payrolls increased for the 13th straight month as declines in state and local government education were more than offset by gains in hiring elsewhere.
Stocks on Wall Street were trading higher while the dollar was lower against a basket of currencies. U.S. Treasury yields fell.
UNEMPLOYMENT RATE FALLS
Details of the household survey from which the unemployment rate is derived were upbeat.
Household employment increased by 268,000 jobs, more than offsetting a rise of 152,000 in the labor force.
As a result, the unemployment rate fell to 3.5% from 3.6% in June, dropping back to levels last seen more than 50 years ago. That is well below the Fed’s latest median estimate of 4.1% by the fourth quarter of this year.
The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, was unchanged at 62.6% for a fifth straight month.
But the employment-to-population ratio, viewed as a measure of an economy’s ability to create employment, rose to 60.4% from 60.3% in June. The share of the prime-age population with a job held at more than a 22-year high, while the number of people working part-time for economic reasons dropped by 191,000.
With the labor market still tight, wages continued to rise at a brisk clip. Average hourly earnings climbed 0.4%, matching the gain in June. That kept the year-on-year increase in wages at 4.4%.
Wages are now rising faster than inflation, boosting households’ purchasing power and underpinning consumer spending as well as keeping the overall economy afloat.
Though annual wage growth remains too high to be consistent with the Fed’s 2% inflation target, economists do not believe that last month’s readings on their own were sufficient to justify another rate hike this year. The U.S. central bank has raised its policy rate by 525 basis points since March 2022.
Annual inflation slowed sharply in June and wages moderated in the second quarter. Productivity also rebounded in the second quarter, curbing growth in labor costs. Financial markets expect the Fed will keep rates steady for the rest of the year, according to CME Group’s FedWatch tool.
“With productivity growth accelerating, wage growth of 4% is no longer necessarily a deal-breaker for the Fed,” said Paul Ashworth, chief North America economist at Capital Economics in Toronto.
(Reporting by Lucia Mutikani; editing by Diane Craft and Paul Simao)
