US labor market deficits fear recession as job growth picks up in July

  • Nonfarm payrolls increased 528,000 in July
  • The unemployment rate fell to 3.5% from 3.6% in June
  • Average hourly earnings are up 0.5%; 5.2% increase year over year
  • Participation rate fell to 62.1% from 62.2% in June

WASHINGTON (Reuters) – U.S. job growth unexpectedly accelerated in July, raising employment above its pre-pandemic level and pouring cold water on fears the economy is entering a recession.

The closely watched Labor Department employment report on Friday also showed that employers continue to raise wages at a solid rate and generally maintain longer working hours for workers. Continued strength in the labor market can give the Federal Reserve a free hand to keep interest rates aggressively high.

“If the US economy is in a recession, no one seems to have informed employers,” said Sarah House, chief economist at Wells Fargo in Charlotte, North Carolina. “We believe this data will give the Fed the confidence it needs to move forward aggressively in its fight against inflation.”

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The Institutional Survey showed non-farm payrolls increased by 528,000 last month, the largest increase since February. The data for June was revised higher to show 398,000 jobs created instead of the 372,000 previously reported. July marked the 19th consecutive month of payroll expansion, and it blew economists’ expectations for a gain of just 250,000 jobs.

Reuters survey estimates of the number of jobs gained ranged from 75,000 to 325,000.

Salary Surprise

The labor market has now regained all the jobs it lost during the COVID-19 pandemic, although government hiring remains around 597,000 jobs in the hole. Total employment is now 32,000 higher than it was in February 2020.

It took just under two and a half years to restore all jobs compared to at least six years after the 2007-2009 Great Recession.

The Federal Reserve last week raised interest rates by three-quarters of a percentage point and officials pledged more increases as the US central bank tries to rein in inflation. Annual consumer prices are rising at their fastest pace in four decades. Since March, the Fed has raised its key overnight interest rate from nearly zero to a range of 2.25% to 2.50%.

“The Fed is probably looking to be able to maintain its current trajectory without constantly looking over its shoulder, making it the envy of world economies who are carrying out the same balancing act right now,” said James Bentley. Corporate Director at Financial Markets Online.

US GDP declined in the first and second quarters, matching the standard definition of a recession. The economic contraction was 1.3% in the first half of the year due to large fluctuations in inventories and trade deficits linked to faltering global supply chains.

The National Bureau of Economic Research, the official arbiter of recessions in the United States, defines a recession as “a significant decline in economic activity spread throughout the economy, lasting for more than a few months, and typically visible in production, employment, real income, and other indicators.”

But even with the strong job gains in July, some cracks are forming in the labor market. Companies in the interest rate-sensitive housing, finance, technology and retail sectors are laying off workers. However, with 10.7 million vacant jobs at the end of June and 1.8 jobs for every unemployed person, a sharp slowdown in job growth is unlikely this year.

A pedestrian passes the “Help Wanted” sign at the door of a hardware store in Cambridge, Massachusetts, US, July 8, 2022. REUTERS/Brian Snyder/

Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. US Treasury bond prices fell.

Extensive gain

The broad gains in jobs last month, which added 96,000 positions, were led by the leisure and hospitality sector, mostly in restaurants and bars. But leisure and hospitality employment is still 1.2 million lower than its level in February 2020.

Payrolls for professional and business services increased by 89,000 jobs, while the healthcare sector added 70,000 jobs. Government jobs jumped by 57,000, buoyed by local government education. Construction added 32,000 jobs while manufacturing payrolls increased by 30,000.

Details of the household survey from which the unemployment rate was derived were mixed. While the unemployment rate fell to its pre-pandemic low of 3.5% from 3.6% in June, that was due to 63,000 people leaving the workforce. The workforce has now declined for two consecutive months.

The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for a job, fell to 62.1% from 62.2% in June. This mostly reflects a decline in teenage participation.

Post rate

The adult population participation rate increased to 82.4% from 82.3% in June. The employment-to-population ratio for this group rebounded to 80%, consistent with full employment.

The number of people working part-time for economic reasons rose by 303,000 to 3.9 million after dropping to a 20-year low in June.

But domestic employment rebounded by 179,000 jobs after falling 315,000 in June, and the number of people with long periods of unemployment fell 269,000 to 1.1 million, the lowest level since April 2020. This long-term unemployment accounted for 18.9% of the 5.7 million jobless in July .

With the labor market tightening further, average hourly earnings rose 0.5% after rising 0.4% in June. This resulted in a year-over-year wage increase of 5.2%. The work week is unchanged at 34.6 hours.

Wage gains were mostly driven by industries in the service sector, including entertainment, hospitality, financial, professional and business services. Take-home agent is up 1.2% month over month, which bodes well for consumer spending amid lower gasoline prices.

“Wage growth risks appear to be on the upside in the near term given the continued strength of the labor market and the lack of recovery in the labor supply,” said Lydia Bosor, chief US economist at Oxford Economics in New York.

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(Reporting by Lucia Mutikani) Editing by Chizu Nomiyama and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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