The US economy maintained a moderate pace of job growth in July, but solid wage gains and a decline in the unemployment rate pointed to continued tightness in labour market conditions.
Nonfarm payrolls increased by 187,000 jobs last month, the labour Department said in its closely watched employment report on Friday. Data for June was revised lower to show 185,000 jobs added instead of the previously reported 209,000.
Economists polled by Reuters had forecast a gain of 200,000 jobs. The economy needs to create roughly 100,000 jobs per month to keep up with growth in the working-age population.
Companies are hoarding workers after struggling to find labour during the COVID-19 pandemic. Employment in some areas like leisure and hospitality remains below pre-pandemic levels.
Despite the moderation in job growth, the labour market remains tight. 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 government reported this week that there were 1.6 job openings for every unemployed person in June, little changed from May.
Wages continued to rise at a solid clip. Average hourly earnings gained 0.4% after climbing by the same margin in June.
That kept the year-on-year increase in wages at 4.4%.
The annual wage growth remains too high to be consistent with the Fed’s 2% inflation target. Data last month showed the increase in annual inflation slowed sharply in June.
Economists who have long been forecasting a downturn by the fourth quarter of this year are increasingly becoming convinced that the “soft-landing” scenario for the economy envisaged by the Fed is now possible.
The raft of inflation-friendly data has led many economists to believe that the Fed’s fastest rate hiking cycle in more than 40 years was probably over. The US central bank has raised its policy rate by 525 basis points since March 2022.
The Fed wants to see hiring cool off. Strong demand for workers pushes up wages and can force companies to raise prices to make up for the higher costs.
One welcome sign from the Fed’s perspective: Americans are returning to the job market, making it easier for employers to find and keep workers without offering substantial pay increases. The pandemic encouraged many older workers to retire ahead of schedule and kept others sidelined by health concerns and difficulty getting childcare. The share of Americans working or looking for work - the so-called labor force participation rate - sank to 60.1% in April 2020, the lowest since 1973 when many American women did not work outside the home. The participation rate has since recovered - though not to pre-pandemic levels - as health worries faded and pay rose.
For those in their prime working years - 25 to 54 - the participation rate hit 83.5%% in June, the highest since 2002. And in June, 77.8% of prime-age women were working or looking for work, the highest share in government records going back to 1948.
A rebound in immigration, as COVID-19 border restrictions were lifted, has also made more workers available.
In response to a cooling labor market, wage pressures have eased, but they remain too intense for the Fed’s comfort. Average hourly pay in July is expected to be up 4.2% from a year earlier, according to the FactSet survey, decelerating from a 4.4% year-over-year increase in June.
Overall inflation has come down steadily. In June 2022, consumer prices were up 9.1% from a year earlier - the biggest year-over-year jump in four decades. It’s fallen every month since then; but at 3% in June, it’s still above the Fed’s 2% target.
The unlikely combination of falling inflation and continued economic strength is easing fears that the United States is destined for a recession later this year or sometime in 2024. “It’s much more plausible that the economy can come back to the Fed’s target without a serious downturn,’’ said Bill Adams, chief economist at Comerica Bank in Dallas.
Separately, the Canadian economy unexpectedly shed a net 6,400 jobs in July, entirely in part-time work, while the jobless rate ticked up to 5.5%, Statistics Canada data showed on Friday.
Analysts polled by Reuters had forecast a net gain of 21,100 jobs and for the unemployment rate to edge up to 5.5% from 5.4% in June.
While headline figures indicated some slowness, the average hourly wage for permanent employees - a figure the Bank of Canada watches closely - rose 5.0% from July 2022. That was higher than the 3.9% annual rise in June, but lower than May’s 5.1% and April’s 5.2% year-over-year increases.