The U.S. economy continued to generate sturdy employment growth in July, but it 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, experiencing 31 straight months of growth. The unemployment rate sank back to 3.5 percent, near a record low.
Revised figures for the prior two months modulated the economic picture slightly from an almost imperceptible slowdown to a clear deceleration after gains exceeding 200,000 had become the norm. Still, the report shows that most people who want to work can find jobs, keeping upward pressure on wages.
Average hourly earnings rose 4.4 percent from a year earlier, slightly more than expected, and enough to give workers more spending power even as prices keep going up.
“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.”
Overall economic growth has remained vigorous in recent months, and it has become clearer that a marked downturn is remote, if not beyond the horizon entirely. Some Wall Street banks and even the Fed’s staff economists in Washington have called off their recession forecasts for this year, betting that inflation can normalize without subjecting workers and businesses to much more pain.
That normalization is visible in a narrowing of employment growth, which a year ago spanned nearly all sectors. Now it appears mostly in health care, which added 63,000 jobs in July, about a third of the total. Leisure and hospitality, which is still digging out of its pandemic-era hole, slowed to 17,000 additional jobs.
Most other industries were flat to negative. Manufacturing, which quailed in the face of higher interest rates and a slowdown in goods consumption, has remained essentially level since the beginning of the year. So has transportation and warehousing.
But with layoffs remaining low while the number of total hours worked sank slightly, it appears that corporate leaders aren’t 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 trim 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.”
That’s what Stephen Bullock is thinking. He is the president of Power Curbers, a manufacturer in North Carolina that specializes in construction equipment used in building subdivisions. Business has calmed down since the building boom of 2021, when Mr. Bullock instituted a $2-an-hour raise for his hourly workers to help retain them and cushion the impact of rising prices. Now, he said, “we don’t feel that pressure at all.”
Still, Mr. Bullock isn’t considering laying off any of his roughly 120 employees — and he said he would try not to even if demand receded further.
“You don’t want to lose people and have to go fill those positions when things get busy,” he said. “So we will look for R-and-D projects, new machine development, maintenance — anything we can do in a slowdown to keep our people busy and productive so we have the people we need in a pickup.”
Late last year, with prices rising at their fastest pace in decades, analysts voiced stronger concerns that the Federal Reserve’s aggressive regimen of interest rate increases would break pieces of the economy more quickly.
So far, however, each sign of weakness has seemed to find a counterbalance. Escalating interest rates deflated the tech industry, but workers who had been laid off quickly found jobs. Residential construction then slowed along with home sales, but there are signs of new momentum, and industrial construction has been buoyed by new federal funding.
The banking turmoil in March and April has tightened lending standards, but it did not metastasize into a crisis. Business investment has been fading, as borrowing has gotten more expensive, but consumer spending has picked up the slack — even if some 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: a labor force that defied predictions of permanent shrinkage.
Although the share of people over age 65 who are either working or looking for work is still lower than in February 2020, the participation rate for people in their prime working years — ages 25 to 54 — has risen 0.4 percentage points. At the same time, a renewed flow of immigrants has eased some of the most acute shortages.
Other factors may be clouding the employment picture this summer. The hottest July on record, for example, made it difficult to perform any work outside. At the very least, that could displace some employment until later in the year. The longer temperatures stay at extreme levels, the more damage they could do.
“Let’s say construction is cut back a bit more than it otherwise would be, maybe people are working for fewer hours, it’s pushing that activity to the fall,” said Jim Rounds, a former state budget analyst who heads an economic consultancy in Arizona. “If it were over more months, that would be a bigger deal.”
Labor strife has also disrupted hiring lately. Although an agreement between UPS and the Teamsters appears to have averted a strike that could have crippled package delivery nationwide, the walkout by actors in the Hollywood union SAG-AFTRA, which has roughly 160,000 members, could depress employment in the coming months.
Workers’ greater leverage in a tight job market has resulted in substantial pay increases, which could keep wage growth elevated even as inflation subsides.
On Bloomberg Television on Friday, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, noted that wages generally might continue rising as workers catch up to the cost of living, without being a cause for concern. Other economists have noted that if worker productivity improves, as it did this past quarter, wages can grow faster without fueling inflation.
The Fed has lots more data to digest before its next meeting in September, where it is broadly expected to hold rates steady as long as nothing greatly reaccelerates.
The coming months also feature new risks, including the resumption of student loan payments for tens of millions of borrowers in October, the debt overhang from vacant commercial office buildings and the rising tide of defaults on risky loans. Even if nothing collapses, companies may cut payrolls to maintain profit margins as consumers demand lower prices.
That’s why most forecasters still expect meager monthly increases in employment — or even declines — toward the end of 2023, which may finally bring inflation back to the 2 percent rate that the Fed is looking for. But for now, most workers remain optimistic that if they lost their jobs, they wouldn’t remain unemployed for long — and they can afford to be choosy about the next one.
Nathan Beaumont, an operations supervisor in transportation and logistics, was laid off a week ago when the trucking company Yellow said it was shutting down. He had been planning to quit anyway, because the unstable schedule deprived him of time with his fiancée and friends, but he was glad to get two weeks of severance and then unemployment benefits — and isn’t too worried about finding another position.
Right now, he would prefer something that would lend a bit more stability.
“Over the last few years, it seems like every year and a half to two years, I’ve had to look for a new job,” said Mr. Beaumont, who lives in a suburb of Minneapolis. “If I can find a place where I can stay for a good long time, I’ll take that job.”
Jeanna Smialek and Ben Casselman contributed reporting.