July Jobs Report: Pace of U.S. Hiring Slows but Remains Solid

Sep 01, 2023

The labor market moderated in July, reflecting a cooling economy. But wages grew slightly more than expected, and are running faster than policymakers would like as they fight inflation.

Monthly change in jobs

+500,000

+187,000

jobs in July

+400,000

+300,000

+200,000

+100,000

July

’22

Oct.

Jan.

’23

April

July

+500,000 jobs

+187,000

jobs in July

+400,000

+300,000

+200,000

+100,000

July ’22

Oct.

Jan. ’23

April

July

Note: Data is seasonally adjusted.

Source: Bureau of Labor Statistics

By Karl Russell

Lydia DePillis

The U.S. economy continued to produce sturdy employment growth in July, but 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, a figure that exceeded the flow of people entering the labor market. The unemployment rate sank back to 3.5 percent, near a record low.

The report shows that most people who want to work can find jobs, keeping upward pressure on wages. But with a revision of the June increase, it was the second straight month of gains below 200,000 — a figure that had previously been exceeded every month since January 2021.

Average hourly earnings rose 4.4 percent from a year earlier, slightly more than expected, and still faster growth than monetary policymakers would like.

“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.”

Areas of employment growth have narrowed markedly over the past year, from spanning across nearly all sectors to appearing mostly in health care, which added 63,000 jobs. Leisure and hospitality, which is digging out of its pandemic-era hole, slowed to 17,000 additional jobs.

Most other industries were flat to negative. Manufacturing, which has quailed in the face of higher interest rates and a slowdown in goods consumption, has been essentially level since the beginning of the year. So has transportation and warehousing.

But with layoffs remaining low and the number of total hours worked sinking slightly, it appears that corporate leaders are avoiding 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 cut 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.”

Economic growth overall has remained vigorous, and it has become clearer that the prospect of an outright recession is remote, if not beyond the horizon entirely.

Each sign of weakness so far has seemed to find a counterbalance. Escalating interest rates deflated the tech industry, but laid-off workers quickly found jobs in other sectors. Residential construction then slowed along with home sales, although there are signs of new momentum. Business investment has been fading, as borrowing has gotten more expensive, but consumer spending has picked up the slack — even if much 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 is a labor force that defied predictions of permanent shrinkage. A larger share of women in their prime working years are in the labor force than before the pandemic, and a renewed flow of immigrants has eased some of the most acute shortages.

Labor strife has threatened to cloud the employment picture this summer. The walkout by 160,000 members of the Hollywood actors’ union did not start early enough in July to affect the Bureau of Labor Statistics survey, but because striking workers are not counted as employed, the dispute could depress job data going forward.

There are other risks, including the resumption of student loan payments for tens of millions of borrowers in September, the debt overhang from still-vacant commercial office buildings and the rising tide of defaults on risky loans. That’s why most forecasters still expect very low to negative job growth toward the end of 2023, which may finally bring inflation back to the 2 percent rate that the Federal Reserve is looking for.

Lydia DePillis

Labor force participation remained steady overall, but that masks changes in the critical category of folks between the age of 25 and 54. Among those, 89.4 percent of men are now working or looking for work, exceeding their prepandemic level slightly. Among prime aged women, 77.5 percent are working or looking for work.

Share of people ages 24 to 54 in the labor force

83.4%

83%

82

81

80

2019

2020

2021

2022

2023

83.4%

83%

82

81

80

2019

2020

2021

2022

2023

Note: Data is seasonally adjusted.

Source: Bureau of Labor Statistics

By Karl Russell

Joe Rennison

As trading progressed, investors appeared to take the mixed data as limiting the need for the Fed to raise interest rates again when the central bank meets in September. The two-year Treasury yield, which is sensitive to interest rate expectations, eased roughly 0.1 percentage point to 4.82 percent.

Joe Rennison

The slide in Treasury yields also helped the stock market, with the S&P 500 rising 0.3 percent in morning trading.

Aug. 4

4,480

4,490

4,500

4,510

4,520

4,530

4,540

Data delayed at least 15 minutes

Source: FactSet

By: Ella Koeze

J. Edward Moreno

But some investors still worry that strong wage growth will push the Fed to increase interest rates. Quincy Krosby, chief global strategist for LPL Financial, said that “higher than desired hourly wages will remain a concern as it’s been a key source of the ‘sticky’ inflation the Fed is focused on.”

Lydia DePillis

One thing I’ve been wondering about is whether the extreme heat in the Southwest in particular has depressed job growth. It will take a few weeks before we have state and local numbers, but Jim Rounds, an Arizona-based economic consultant, said it’s quite possible that some activity has at least been displaced.

Lydia DePillis

“If things are a little too extreme — 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,” he said.

Katie Rogers

President Biden touted the new jobs report as vindication of his economic agenda. “Unemployment near a record low and the share of working age Americans who have jobs at a 20-year high: that’s Bidenomics,” he said in a statement. “This follows recent news that our economy continues to grow, while inflation has fallen by nearly two thirds and is at its lowest level in more than two years.“

Santul Nerkar

While the overall unemployment rate fell to 3.5 percent, it varied by demographic group. The unemployment rate for white workers held steady at 3.1 percent, while it slightly ticked down for Black workers (5.8 percent, down from 6 percent) and up for Hispanic workers (4.4 percent, up from 4.3 percent).

Santul Nerkar

Despite the drop in July, Black unemployment remains higher than in April, when it reached a historic low of 4.7 percent. Though changes in unemployment by demographic groups can be noisy, the 1.1 percentage-point difference over the past three months is a statistically significant change, according to the Bureau of Labor Statistics.

Ben Casselman

One of the biggest surprises in the labor market in recent months has been the resilience of employment in the construction industry despite the big increase in mortgage rates and the resulting slowdown in homebuilding. The trend continued in July, with construction companies adding 19,000 jobs.

Ben Casselman

Dig in a bit deeper, though, and it becomes clearer what’s going on. Residential builders cut 5,500 jobs in July. But those declines were more than offset by growth in nonresidential building. That could reflect in part the recent growth in factory building, which is almost certainly tied to government investments in manufacturing.

J. Edward Moreno

The dollar appears to be the most responsive to the jobs numbers, sliding 0.3 percent for the day as stock futures remain muted.

Jeanna Smialek

Year-over-year percentage change in earnings vs. inflation

+8%

+6

AVG. HOURLY

EARNINGS

+4.4%

in July

+4

CONSUMER

PRICE INDEX

+2

+3.0%

in June

2019

2020

2021

2022

2023

+8%

+6

AVG. HOURLY

EARNINGS

+4.4%

in July

+4

CONSUMER

PRICE INDEX

+2

+3.0%

in June

2019

2020

2021

2022

2023

Note: Earnings data is seasonally adjusted.

Source: Bureau of Labor Statistics

Federal Reserve officials have been watching for a cooling in the labor market, hoping that demand for workers and the supply of labor come back into balance. Friday’s employment report offered some evidence that the moderation is underway — though it is very gradual.

Employers are adding fewer jobs, but the pace of hiring remains healthy. Unemployment continues to hover around a historically low level, but it is not plumbing new lows. Wage gains remain robust: Average hourly earnings climbed 4.4 percent in the year through July, unchanged from June.

All the evidence of strength is paired with a few signs that labor demand is cooling around the edges. Hours worked are declining, which is a sign that employers aren’t trying to squeeze as much out of their employees. And unfilled job openings continue to drop.

Altogether, the data will probably give Fed officials some comfort that their efforts to slow growth by lifting interest rates are slowly working, while also providing evidence that the economy is not plunging into a recession.

While that combination is good news, officials will need to watch incoming data — including the August jobs report and two months’ worth of inflation figures — as they try to figure out whether they need to raise rates at their next meeting, in September. Policymakers have already lifted borrowing costs to a range of 5.25 to 5.5 percent, and have predicted that they might make one more rate move before the end of 2023. But they have said that whether and when they take such an action would hinge on incoming economic information.

Officials have been hesitant to clearly define what would persuade them to pause further rate increases. But they have embraced the recent slowdown in hiring.

“What we’re looking for is a broad cooling in labor market conditions, and that’s what we’re seeing,” Jerome H. Powell, the Fed chair, said during a news conference last week. “By so many indicators,” he added, “labor market demand is cooling.”

While wage gains remain unusually rapid, they may not prove to be a be-all, end-all indicator for the Fed.

Mr. Powell noted last week that Fed officials do not target wage growth specifically, and some Fed officials have been making a case that steep pay gains could be a sign that workers have been trying to keep up with higher inflation by bargaining for higher pay, so wage inflation could come down as price increases fade.

Still, officials will keep an eye on how pay gains evolve over the coming months. Some economists worry that it could be hard to fully stamp out inflation if wages are climbing quickly and the economy has too much momentum. In such a scenario, companies would likely try to charge more to cover their climbing labor bills, and consumers might be able to afford higher prices thanks to their improved incomes.

The fresh employment report “will just reinforce existing views,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, explaining that officials who favor higher rates and those who favor leaving rates on hold could both probably find evidence to bolster their stance.

“I do not see it as a knockout blow for either side here,” he said. “I don’t even see it as a big punch.”

Lydia DePillis

Among the major sectors, there were no big red flags, but certain industries are leveling out. Leisure and hospitality, which remains substantially below its prepandemic level, only added 17,000 jobs, after an average of 67,000 in the first quarter of the year.

Change in jobs in July 2023, by sector

Education

and health

+100,000

jobs

+19,000

Construction

Leisure and

hospitality

+17,000

Government

+15,000

+8,500

Retail

–2,000

Manufacturing

Business

services

–8,000

+100,000 jobs

Education and health

+19,000

Construction

+17,000

Leisure and hospitality

+15,000

Government

+8,500

Retail

–2,000

Manufacturing

–8,000

Business services

Note: Data is seasonally adjusted.

Source: Bureau of Labor Statistics

By Karl Russell

Lydia DePillis

The big loser, again, was temporary help services — a category that tends to swing downwards quickly as businesses’ staffing needs stabilize. That industry is down 205,000 jobs since its peak in March of 2022.

Jeanna Smialek

This is a point made by Indeed’s Nick Bunker: “One cause for concern in the report is that temporary help services, a traditional bellwether of hiring appetites.” The logic here is that if you are feeling a pinch as a business, you’re likely to cut back on contractors and other temporary workers first.

Joe Rennison

Financial markets remained largely unmoved following the fresh jobs numbers. The data showed the labor market cooling faster than expected, while still remaining resilient to higher interest rates.

Joe Rennison

Futures on the S&P 500, which allow investors to bet on the market before the official start of trading, initially inched upward to a gain of 0.3 percent, before quickly subsiding to a small loss for the day.

Santul Nerkar

Labor productivity improved by 3.7 percent in the second quarter, according to data released on Thursday, better than what economists expected. Initial jobless claims for this week, 227,000, were up by 6,000 from the previous week but less than the four-week moving average, 228,250.

Santul Nerkar

However, labor productivity remains low by historical standards. That might be because employers are hoarding workers as they try to refill head counts lost during the pandemic. Layoffs in July were the lowest since December 2022.

Jeanna Smialek and Ben Casselman

Good news is bad news: It had been the mantra in economic circles ever since inflation took off in early 2021. A strong job market and rapid consumer spending risked fueling further price increases and evoking a more aggressive response from the Federal Reserve. So every positive report was widely interpreted as a negative development.

But suddenly, good news is starting to feel good again.

Inflation has finally begun to moderate in earnest, even as economic growth has remained positive and the labor market has continued to chug along. But instead of interpreting that solid momentum as a sign that conditions are too hot, top economists are increasingly seeing it as evidence that America’s economy is resilient. It is capable of making it through rapidly changing conditions and higher Fed interest rates, allowing inflation to cool gradually without inflicting widespread job losses.

Jeanna Smialek

Federal Reserve officials will receive four major economic reports before making their next interest-rate decision, and Friday will bring the first of those: the July jobs numbers.

Central bankers are closely watching the job market nearly a year and a half into their push to wrestle inflation back under control by slowing the economy with a series of rate increases. The July and August employment figures, along with the two upcoming inflation reports covering the same months, are likely to weigh on their minds as they consider whether to lift rates again in September — or whether to defer that move or even nix it altogether.

Officials have been hesitant to clearly define what they would have to see in the jobs reports to persuade them to pause further rate increases. But they have embraced a recent slowdown in hiring and a nascent cooling in wage growth as signs that demand for workers and the supply of labor are coming back into balance.

“What we’re looking for is a broad cooling in labor market conditions, and that’s what we’re seeing,” Jerome H. Powell, the Fed chair, said during a news conference last week. “By so many indicators,” he added, “labor market demand is cooling.”

Mr. Powell noted that Fed officials do not target wage growth specifically, and some Fed officials have been making a case that steep pay gains could be a sign that workers have been trying to keep up with higher inflation by bargaining for higher pay — so wage inflation could come down as price increases fade.

But policymakers would likely be wary if the job market showed signs of picking back up. Some worry that it could be hard to fully stamp out inflation if wages are climbing quickly and the economy has too much momentum: In such a scenario, companies would try to charge more to cover their climbing labor bills, and consumers would be able to afford higher prices thanks to their improved incomes.

That’s why investors and economists will scrutinize Friday’s wage numbers, which are expected to show that average hourly earnings growth cooled slightly, to 4.2 percent over the past 12 months, from 4.4 percent in the year through June.

A separate wage measure that the Fed watches closely showed last week that pay gains have been gradually cooling in recent months. The July figures in Friday’s report could add another data point to that trend.

J. Edward Moreno

As companies reported their latest quarterly earnings in recent weeks, hiring, wages and head counts were popular topics as analysts quizzed executives about their plans.

Some said they were avoiding expanding their payrolls as rapidly as in the past. Others said that rising wages remained a worry for their bottom lines. And many still looking to hire said that attracting and retaining workers was difficult as the labor market remained robust.

“You have to work extra to hire people and to keep people,” Andrew Watterson, the chief operating officer of Southwest Airlines, said on a call with analysts. “Our clients still grapple with labor shortages,” said Martine Ferland, who runs the consultancy Mercer.

Even so, the rate of workers quitting their jobs, a measure of workers’ confidence in their prospects and bargaining power, continued to fall in June, according to data released Tuesday. “If you think about our turnover coming down, that means we don’t have as many people we’re hiring as we were before,” said Rick Cardenas, the chief executive of Darden Restaurants, owner of the Olive Garden chain.

Wage growth has also cooled in recent months, but remained robust last month, rising 4.4 percent from a year earlier. “We still face above normal levels of wage and benefit cost inflation in our cost structure,” Andre Schulten, the finance chief at the consumer goods company Procter & Gamble, said on a call with analysts.

Kathryn A. Mikells, the chief financial officer of Exxon Mobil, said that the oil giant had seen lower prices for some of its materials like chemicals and sand, but “as it relates to things where labor is a high component of the cost, I would say we’re not yet necessarily seeing that deflationary pressure coming through yet.”

Anthony Wood, the chief executive of Roku, the streaming device maker, told analysts that the company would continue hiring, but planned to do so outside of the United States, in places where workers “are just less expensive than Silicon Valley engineers.”

Other companies, especially in the tech industry, said that they had become more judicious about hiring, with some freezing payrolls or even cutting jobs.

Mark Zuckerberg of Meta, which cut tens of thousands of jobs in multiple rounds of layoffs since late last year, said last week that “newly budgeted head count growth is going to be relatively low” at the company, which owns Facebook, Instagram and WhatsApp. Sundar Pichai of Alphabet said that the tech giant would “continue to slow our expense growth and pace of hiring.”