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Job report: Employers added just 114,000 jobs in July as unemployment jumped to 4.3%

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Job report: Employers added just 114,000 jobs in July as unemployment jumped to 4.3%

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U.S. hiring slowed substantially in July as employers added a disappointing 114,000 jobs amid historically high interest rates, persistent inflation and growing household financial stress.

The unemployment rate rose from 4.1% to 4.3%, highest since October 2021, the Labor Department said Friday. The rise along with the pullback in payroll gains and slowing wage growth bolsters the Federal Reserve’s case for cutting interest rates in September,

Economists had estimated that 175,000 jobs were added last month, according to a Bloomberg survey.

How does the Sahm rule work?

The unexpected sharp rise in the jobless rate triggers the Sahm rule. It says that if unemployment, based on a three-month average, rises by at least a half percentage point over the past 12 months, the nation is probably in a recession.

While the rule has correctly predicted all U.S. recessions since the 1970s, many economists say this time is different. An immigration surge, along with the return of many Americans to the workforce after COVID, has caused unemployment to climb without the usual spread of layoffs because many people who are looking for jobs haven’t yet landed positions.

Still, the rising unemployment rate underscores that the job market is weakening and it eventually could set off a downturn, says Wells Fargo economist Sarah House.

Has wage growth slowed?

Average hourly pay rose 8 cents to $35.07, pushing down the yearly increase to 3.6%, the lowest since May 2021.   

Wage growth generally has slowed as pandemic-related worker shortages have eased, and it’s close to the 3.5% pace that aligns with the Federal Reserve’s 2% inflation goal.

Several factors were expected to affect the labor market last month. In Texas, Hurricane Beryl likely reduced job growth by about 15,000, Goldman Sachs estimates. But the Labor Department said the storm “had no discernible effect” on the job numbers, A record heat wave across much of the country also could have crimped payrolls, says economist Lydia Boussour of EY-Parthenon.

An immigration surge, while losing some steam, is still adding about 50,000 workers a month to the labor supply and allowing employers to fill job openings, Goldman says. At the same time, it’s pushing up the unemployment rate because it can take time for recent immigrants to find jobs.

What is the labor force participation rate?

Immigration helped increase the labor force participation rate – the share of adults working or looking for jobs – to 62.7% as the workforce expanded by 420,000 people. That’s a good thing because it relieves worker shortages and puts downward pressure on pay increases that have stoked inflation. But it results in higher unemployment.

Is the job market improving?

More generally, job gains have gradually slowed the past couple of years as catch-up hiring following the pandemic has petered out, and high inflation and interest rates have discouraged some businesses from bringing on workers.

Hiring has slipped well below pre-pandemic levels and the number of people quitting jobs – typically to take another, higher-paying position- has tumbled to the lowest mark since 2020, Labor said this week.

The main engine for job growth, consumer spending, remains solid. But low- and middle-income households are burdened with near record credit card debt and high delinquencies. And they’ve mostly depleted their pandemic-related savings. As a result, consumption is expected to slow.

U.S. employment overall has stayed remarkably resilient, largely because companies have been hesitant to lay off workers after severe COVID-related labor shortages. But that appears to be shifting as well. Jobless claims, a gauge of layoffs, are still low by historical standards but last week rose to the highest level in more than a year.

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