Sharp slowdown in US job growth boosts unemployment rate to 4.3%

[August 03, 2024]  By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. unemployment rate jumped to near a three-year high of 4.3% in July amid a significant slowdown in hiring, heightening fears the labor market was deteriorating and potentially making the economy vulnerable to a recession.

The increase in the unemployment rate from 4.1% in June marked the fourth straight monthly increase, the Labor Department reported on Friday.

Its rise from a five-decade low of 3.4% in April 2023 to now the highest level since September 2021 all but guarantees a September interest rate cut from the Federal Reserve, with economists calling for a 50 basis point reduction in borrowing costs. They argue that the U.S. central bank is most likely behind the curve in easing monetary policy.

The sharp slowdown in the labor market had been flagged for a while in sentiment surveys and a rise in the number of people on unemployment benefits. The Fed's rate hikes in 2022 and 2023 have weighed on demand for labor, with government data this week showing hires in June were the lowest in four years.

The employment report, which also showed the increase in annual wages last month was the smallest in more than three years, prompted some Wall Street institutions, including Bank of America Securities, to pull forward their rate cut expectations to September from December. Goldman Sachs now anticipates three rate cuts this year instead of only two before the data.

"If Fed officials had seen this report, they would have cut rates by 25 basis points this week," said Brian Bethune, an economics professor at Boston College. "There is absolutely no justification for continuing to exert an elevated level of monetary restrictiveness on the economy."

Nonfarm payrolls increased by 114,000 jobs last month, the Labor Department's Bureau of Labor Statistics said. That was well below the 215,000 jobs per month added over the last 12 months, and the at least 200,000 that economists say are needed to keep up with growth in the population, accounting for the recent surge in immigration.

Economists polled by Reuters had forecast payrolls would advance by 175,000 jobs. The establishment survey, from which payrolls are counted, also showed the economy created 29,000 fewer jobs in May and June than previously reported.

The BLS said Hurricane Beryl, which slammed Texas during the survey week of the July employment report, had "no discernible effect" on the data.

The household survey, however, showed 436,000 people reported that they could not report to work because of bad weather last month, the highest on record for July. There were 249,000 people on temporary layoff last month.

The average workweek fell to 34.2 hours from 34.3 hours in June, also suggesting that Beryl had some impact on the labor market. But construction payrolls increased as did leisure and hospitality employment, which would weaken the weather argument.

The healthcare sector continued to lead employment gains, with payrolls rising by 55,000 jobs. Construction payrolls increased by 25,000 jobs, while leisure and hospitality added 23,000 positions.

Government employment rose by 17,000 jobs. There were also employment gains in the transportation and warehousing as well as social assistance sectors.

But information industry payrolls dropped 20,000 jobs. Financial activities lost jobs as did professional and business services, with temporary help services positions - a harbinger of future hiring - declining by a further 8,700.

A pedestrian passes a "Now Hiring" sign at a Chase Bank branch in Somerville, Massachusetts, U.S., September 1, 2022. REUTERS/Brian Snyder/File Photo

The breadth of job gains continued to narrow, with 49.6% of industries reporting an increase in employment, down from 56.0% in June.

Fed Chair Jerome Powell told reporters on Wednesday that while he viewed the changes in the labor market as "broadly consistent with a normalization process," policymakers were "closely monitoring to see whether it starts to show signs that it's more than that."

Stocks on Wall Street fell sharply. The dollar dropped to a four-month low against a basket of currencies. U.S. Treasury prices rose, with the yield on the benchmark 10-year note falling to its lowest since December.

WAGE GROWTH COOLS

The Fed on Wednesday kept its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been for more than a year but opened the door to reducing borrowing costs as soon as its next meeting in September. Financial markets and economists are also expecting rate cuts in November and December.

Average hourly earnings rose 0.2% last month after climbing 0.3% in June, likely impacted by a calendar quirk as the survey week in July did not include the 15th.

In the 12 months through July, wages increased 3.6%, the smallest year-on-year gain since May 2021 and following a 3.8% advance in June. That left wage growth just above the 3%-3.5% range seen as consistent with the Fed's 2% inflation target, extending the run of inflation-friendly data.

While the jump in the unemployment rate triggered the Sahm rule on recessions, economists pushed back against concerns that a downturn could already be underway. They argued that the rise in the jobless rate was not because of layoffs, but rather an immigration induced jump in labor supply.

About 420,000 people entered the labor force last month, while household employment only increased by 67,000 jobs. The number of people working part-time for economic reasons increased by 346,000 to 4.6 million. But there were little changes in permanent job losers and long-term unemployment.

A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, surged to 7.8% after holding at 7.4% for three straight months.

"This doesn't look like the start of a recession, where demand drops away from supply," said Tara Sinclair, director of the GW Center for Economic Research. "But it's still weakness. The Fed has medicine to treat this weakness."

(Reporting by Lucia Mutikani; Editing by Andrea Ricci, Chizu Nomiyama and Paul Simao, Kirsten Donovan)

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