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A modest jobs gain of 114,000 in July, plus a large downward revision to the June jobs number, show that the weakening in the labor market is real. This will likely give the Federal Reserve the justification it needs to begin cutting short-term interest rates at its next policy meeting on September 18. While there were no large cutbacks in jobs by industry, there were a lot of small declines. A dip in both business support services and temporary workers indicated that businesses are still in a cost-cutting mode. Media companies, the movie industry and banks shed jobs, as did local governments. The health care sector had fewer new hires than usual. Employment in the manufacturing sector was little changed, though this is not unusual. On the plus side, both food service and retail added workers after holding flat or declining in June, respectively.
The weakening in July is likely overstated, and job gains should bounce back to around 150,000 in August. The drop in local government employment is a mystery, and could reverse. Employment during summer months can be volatile because of variations in seasonal employment patterns. However, any further weakening of the labor market would be worrisome, and would likely prompt a bigger rate cut from the Fed.
The unemployment rate rose to 4.3%, but many of the newly (and temporarily) unemployed were agricultural workers affected by Hurricane Beryl in Texas. The hurricane knocked out power to 3 million people in early July and affected 121 counties in the state. Excluding these ag workers, the unemployment rate would likely have stayed at 4.1%.
The rise in the unemployment rate crossed the threshold for the so-called “Sahm Rule,” named for economist Claudia Sahm, which says that a recession is sure to occur when the three-month moving average of the unemployment rate rises by half a percentage point from its cyclical low. In 10 of the past 11 recessions going back to 1953, when the Sahm Rule was triggered, the economy had already fallen into recession. However, this time is likely different, because labor shortages after the pandemic artificially depressed the unemployment rate, so part of its recent rise is simply a return to normal. That is not to say there hasn’t been any weakening, but rather that a further downturn in the jobs market would still be needed to trigger a recession this time.
Annual wage growth eased further, to 3.6%, in July. Wage growth usually lags any slowdown in the labor market, but it appears the easing in job growth that began earlier this year is finally having an effect. Expect pay raises to end the year at about a 3.5% rate. Wages of nonsupervisory employees are growing a bit faster, at 3.8%, and should end the year at a 3.7% pace.
