The U.S. economy continued to produce sturdy employment growth in July, but showed definite signs of cooling alongside the Federal Reserve’s battle to suppress inflation.
American employers added 187,000 jobs last month, the Labor Department reported on Friday, a figure that exceeded the flow of people entering the labor market. The unemployment rate sank back to 3.5 percent, near a record low.
The report shows that most people who want to work can find jobs, keeping upward pressure on wages. But with a revision of the June increase, it was the second straight month of gains below 200,000 — a figure that had previously been exceeded every month since January 2021.
Average hourly earnings rose 4.4 percent from a year earlier, slightly more than expected, and still faster growth than monetary policymakers would like.
“We are converging towards a more sustainable pace,” said Lydia Boussour, a senior economist at the consulting firm EY-Parthenon, noting that wages and the rate of hiring don’t always move in tandem. “The labor market is rebalancing, but it’s a gradual process, and that explains why we’re still seeing some tightness.”
Areas of employment growth have narrowed markedly over the past year, from spanning across nearly all sectors to appearing mostly in health care, which added 63,000 jobs. Leisure and hospitality, which is digging out of its pandemic-era hole, slowed to 17,000 additional jobs.
Most other industries were flat to negative. Manufacturing, which has quailed in the face of higher interest rates and a slowdown in goods consumption, has been essentially level since the beginning of the year. So has transportation and warehousing.
But with layoffs remaining low and the number of total hours worked sinking slightly, it appears that corporate leaders are avoiding cutting payrolls drastically even as business slows. The biggest category to shed jobs was temporary help services, which had surged in early 2022; employers typically cut their contingent labor when their staffing needs stabilize.
“For those who still believe that there may be a soft spot ahead, it’s going to be manageable,” said Dana Peterson, chief economist at the Conference Board. “It’s going to be short, it’s going to be shallow, so they’re not going to shed a bunch of workers.”
Economic growth overall has remained vigorous, and it has become clearer that the prospect of an outright recession is remote, if not beyond the horizon entirely.
Each sign of weakness so far has seemed to find a counterbalance. Escalating interest rates deflated the tech industry, but laid-off workers quickly found jobs in other sectors. Residential construction then slowed along with home sales, although there are signs of new momentum. Business investment has been fading, as borrowing has gotten more expensive, but consumer spending has picked up the slack — even if much of it is going on credit cards.
Kermit Baker, the chief economist at the American Institute of Architects, says that while the group’s billings index measuring new contracts for design firms has been wobbly for the better part of a year, he thinks the worst is over.
“I’m guessing when we look back on this period in a year from now, we’ll say that this was a series of rolling recessions,” Dr. Baker said. “There will be parts of the country that say, ‘That was a pretty rocky time.’ There will be other parts that say: ‘Recession? What recession?’”
Through it all, employment has not just exceeded its 2019 level, but it has even approached the trajectory it might have been on had the pandemic not intervened. Helping it along is a labor force that defied predictions of permanent shrinkage. A larger share of women in their prime working years are in the labor force than before the pandemic, and a renewed flow of immigrants has eased some of the most acute shortages.
Labor strife has threatened to cloud the employment picture this summer. The walkout by 160,000 members of the Hollywood actors’ union did not start early enough in July to affect the Bureau of Labor Statistics survey, but because striking workers are not counted as employed, the dispute could depress job data going forward.
There are other risks, including the resumption of student loan payments for tens of millions of borrowers in September, the debt overhang from still-vacant commercial office buildings and the rising tide of defaults on risky loans. That’s why most forecasters still expect very low to negative job growth toward the end of 2023, which may finally bring inflation back to the 2 percent rate that the Federal Reserve is looking for.
