U.S. job growth slowed at an accelerated pace in July as 114,000 jobs were added and the unemployment rate increased to 4.3%.
The higher jobless rate was driven by the addition of 420,000 people who entered the workforce looking to capture rising wages.
The higher jobless rate was driven by the addition of 420,000 people who entered the workforce looking to capture rising wages.
Average hourly earnings increased by 0.2% on the month and were up by 3.6% on a year-ago basis. On a three-month average annualized basis, they were up by 3.7%.
Over the previous two months, hiring was revised down by 29,000 which implies a total change in employment of 85,000. That figure is well below the 150,000 breakeven rate that we think the economy needs to meet labor force growth.
There is little doubt that overall economic activity, hiring and inflation are cooling. These factors are why we, along with a few other economists, urged the Federal Reserve to reduce its too-restrictive policy rate at its meeting this week.
That did not occur, and we are certain that the Fed will cut its rate at the September meeting. Investors have priced in a growing probability of a November cut as well.
Read more of RSM’s insights on the economy and the middle market.
If there is one primary takeaway from the July jobs report, it is that it is time to cut rates.
Investors on Friday morning were fully pricing in three rate cuts of 25 basis points through the end of the year.
While we are keeping our baseline forecast of two such cuts—one in September and one in December—that could change should economic data deteriorate further or hiring decelerates at a greater pace. We would also revisit our forecast of four 25 basis point cuts next year.
Growth and unemployment
The Sahm Rule implies that if the unemployment rate increases by 0.5% on a three-month moving average over the previous 12 months that a recession has already begun.
While we, like other economists, are fond of generalized rules of thumb, we think that this one likely did not survive the shocks of the pandemic era.
In any case, to trigger the rule, the unemployment rate taken out to three digits needed to increase to 4.260%—which is reported as a 4.3% rate. But instead the jobless rate increased to 4.253%, so it represents a near miss.
Moreover, it is important to note that final private demand excluding inventories, trade and government consumption through the end of June stood at 2.6%.
The economy is cooling but it has not fallen off the cliff. We will leave it to others to hyperventilate over rules of thumb and the virtue of rounding up on the Sahm Rule.
The data
Total growth in private employment slowed to 114,000 in July from 179,000 in June mostly because of an easing in education and health care hiring of 57,000 from 79,000. Government hiring slowed to 17,000 from 43,000.
Perhaps just as important, the traditional seasonal increase in leisure and hospitality hiring was muted, increasing by only 23,000 after rising by 1,000 in June.
Job losses occurred in the information industry with a decline of 20,000, temporary help dropped by 9,000 and professional business services fell by 1,000.
Higher-wage, goods-producing jobs increased by 25,000 while construction increased by that same amount. Manufacturing increased by 1,000. Trade and transport added 22,000 jobs and the retail trade industry added 4,000.
The median duration of unemployment improved to 9.4 weeks from 9.8 weeks while the employment-to-population ratio eased to 60% from 60.1%. The labor force participation rate increased to 62.7% from 62.6%.
The takeaway
We have made the case over the past few months that the economy is normalizing, and that process involves a cooling in overall activity, hiring and inflation.
Firms have for some time hoarded labor and, given the slowing in the economy, it should be expected that hiring would slow. Our baseline forecast for the second half of the year has been that hiring would increase at an average monthly pace of 120,000 new jobs, which is below the 150,000 breakeven rate.
As 1.15 million people have entered the workforce this year to capture rising wages, the unemployment rate has increased from a historically low 3.4% in January 2023 to the current 4.3%.
In our estimation, this increase represents a normalization following the severe pandemic-era shocks and is not a pure signal of the economy falling off the cliff.
