U.S. job growth slowed more than expected in July and the unemployment rate rose to 4.3%, raising concerns that the labor market could worsen and tip the economy into recession.
In its closely watched jobs report released Friday, the Labor Department’s Bureau of Labor Statistics said nonfarm payrolls rose by just 114,000 last month after a downwardly revised 179,000 increase in June.
Economists had expected payrolls to rise by 175,000 after the economy reported a gain of 206,000 in June.
The unemployment rate is expected to stabilize at a low level of 4.1%, according to a survey of economists by data firm FactSet.
The unsettling data set the stage for another volatile day on Wall Street, with Dow futures dropping more than 300 points in the first hour of trading.
The economy is a major concern for voters ahead of the presidential election in November.
Many are unimpressed by the huge job gains of the past three years and are instead outraged by rising prices.
Two years ago, inflation hit its highest level in 40 years.
Though price increases have eased, consumers are still paying 19% more overall for goods and services than they were before inflation first accelerated in the spring of 2021.
June’s employment report was stronger than expected, but it also had some shortcomings.
First, the Labor Department’s revisions showed that payrolls fell by a combined 111,000 in April and May.
That means monthly job gains averaged 177,000 from April through June, the lowest three-month average since January 2021.
Moreover, the unemployment rate has been rising for the past three months, inching up to 4.3% in July, above the threshold historically considered a sign of a recession.
This is the so-called Sarm rule, named after the former Federal Reserve economist who devised it, Claudia Sarm.
Her research has found that a recession almost always begins when the unemployment rate (based on a three-month moving average) rises by half a percentage point from its lowest point over the past year.
The warning has been triggered during every U.S. recession since 1970, and there have been only two false positives since 1959. Both of those warnings (1959 and 1969) were premature, triggered several months before the recession began.
Still, Sam, now chief economist at investment firm New Century Advisors, said this time around, “a recession is not imminent,” even though the unemployment rate has crossed the Sam Rule threshold.
Many economists believe that today’s rise in the unemployment rate is not a worrying rise in unemployment, but rather an influx of new workers into the American workforce, who may take a long time to find work.
“Demand for labour is slowing,” said Matthew Martin, a US economist at Oxford Economics, “but companies are not laying off large numbers of workers, reducing the likelihood of a negative feedback loop in which rising unemployment leads to lower incomes, lower spending and further layoffs.”
Indeed, the latest data from the Labor Department released this week showed layoffs fell to the lowest level in a year and a half in June.
U.S. employment data has been destabilized by an unexpected surge in immigration over the past few years, much of it illegal.
New immigrants are pouring into the American workforce and helping ease labor shortages across the economy, but not everyone is finding work right away, leading to rising unemployment rates.
What’s more, undocumented immigrants are less likely to respond to Department of Labor employment surveys, so they may not be counted as employed, Oxford’s Martin said.
Still, Sam is concerned about the hiring slowdown and says the job market downturn could only get worse.
“Once the downward momentum gets strong enough, it usually continues to fall,” said Sam. His rule, he said, “is not working as usual, but it shouldn’t be ignored.”
Sarm urged Fed policymakers at their meeting this week to preemptively cut interest rates, but the central bank opted to keep rates on hold at their highest level in 23 years.
The Federal Reserve has raised interest rates 11 times in 2022 and 2023 to combat rising prices.
Inflation, unsurprisingly, has fallen, to 3% in June from 9.1% two years ago.
But interest rates remain above the Fed’s 2% target, and policymakers want to see more evidence that rates continue to fall before they start cutting rates.
Still, the first cuts are widely expected at the next meeting in September.
With post wire
