Job creation surged past economists’ forecasts in July as the labor market’s strength overpowered higher interest rates and elevated inflation.
The US economy added 528,000 nonfarm payrolls last month, the Bureau of Labor Statistics announced Friday. Economists surveyed by Bloomberg anticipated a gain of 250,000 payrolls. The print shows job growth rebounding from the month prior as labor demand held steady through the summer.
The June increase was updated to 398,000 payrolls from 372,000. The May count was revised to a final count of 386,000, up from the prior total of 384,000 jobs.
Overall employment now sits above the levels seen just before the pandemic hit. Several sectors, including the government, have yet to fully rebound, but changes to the economy and how Americans work will likely have a lasting effect on the labor market’s makeup.
The unemployment rate fell to 3.5%, according to the report. That came in below the median economist forecast of 3.6% and matched the five-decade low seen before the pandemic.
“If you thought the economy was in a recession, you were wrong,” John Leer, chief economist at Morning Consult, said. “Paired with falling gas prices, the economic outlook for the third quarter starts looking better.”
Leisure and hospitality once again led the way in job growth with an increase of 96,000 jobs. Within that sector, restaurants and bars counted for 74,000 new payrolls. Employment in the sector is still down roughly 1.2 million payrolls from pre-crisis levels, but the past several months suggest such businesses will continue to add jobs the fastest.
Professional and business services followed with a 89,000-payroll gain. Health care firms created 70,000 jobs, and the government added 57,000 new payrolls.
Clothing and accessories stores posted the largest drop in employment, shedding 5,200 jobs through the month. Some sectors saw hiring largely unchanged through the month, and the majority posted healthy gains.
The July report snaps a months-long trend of moderately slowing job growth. The pace of hiring has been unusually fast throughout 2022 as companies’ healthy demand for workers overshadowed hurdles like the Federal Reserve’s rate hikes and persistently rising prices. Job openings data for June suggested that labor demand could be slowing down, but with overall openings still above 10 million and nearly doubling the number of available workers, the economy will likely keep adding payrolls through the near term.
Other measures included in the report were similarly encouraging. Average hourly earnings climbed by $0.15, or 0.5%, to $32.27 in July, beating the estimate for a 0.3% increase. The uptick offers some relief to Americans shouldering the weight of sky-high inflation. The inflation problem has left most workers with negative real wage growth, meaning their pay isn’t climbing fast enough to keep up with rising prices. Though the July gain on its own won’t flip the script, it signals workers are still winning historically large pay gains.
Labor force participation, however, continued to trend in the wrong direction. The rate, which tracks the share of Americans either working or actively looking for work, slid to 62.1% from 62.2%, marking a second straight decline. With the labor market still extraordinarily tight and some 58 million Americans not in the workforce, it will take a healthy rally in participation for labor supply to balance out with companies’ massive demand.
The economic backdrop, however, is getting more difficult. The Fed raised rates by 0.75 percentage points in late July, matching the size of its June hike and pushing the federal funds rate to a range of 2.25% to 2.5%. That range is broadly viewed as “neutral” by Fed officials, meaning it neither stimulates nor restricts the economy. That means borrowing costs are no longer at the low levels that supported companies over the past two years.
The strong July figures leave the door open for the Fed to keep raising rates at an aggressive pace. The central bank has targeted the labor market as an area where it can cool demand, and officials have repeatedly pointed to wage growth as an area of potential concern. The larger-than-expected increases in wages and overall payrolls signal the Fed will keep pushing rates higher in hopes of balancing out the labor market.
“Not only is the labour market undoubtedly still tight, but wage growth is uncomfortably strong,” Seema Shah, chief global strategist at Principal Global Investors, said. “The Fed has its work cut out for it to create sufficient slack that could ease price pressures.”