US job growth slowed more than expected in July, while the unemployment rate increased to 4.3% — leading to fears that the labor market is deteriorating and potentially making the economy vulnerable to a recession.
Nonfarm payrolls increased by a paltry 114,000 jobs last month after rising by a downwardly revised 179,000 in June, the Labor Department’s Bureau of Labor Statistics said in its closely watched employment report on Friday.
Economists had forecast payrolls advancing by 175,000 jobs after a previously reported 206,000 gain in June.
Unemployment was expected to remain steady at a low 4.1%, according to a survey of economists by the data firm FactSet.
The troubling data led to expectations for another rocky day on Wall Street. Dow futures were down more than 300 points an hour before the opening bell.
The economy is weighing heavily on voters’ minds as they prepare for the presidential election in November.
Many are unimpressed with the strong job gains of the past three years, exasperated instead by high prices.
Two years ago, inflation hit a four-decade high.
The price increases eased, but consumers are still paying 19% more for goods and services overall than they were before inflation first heated up in spring 2021.
The June jobs report, though stronger than expected, came with blemishes.
For one thing, Labor Department revisions reduced April and May payrolls by a combined 111,000.
That meant that monthly job growth averaged just 177,000 from April through June, the lowest three-month average since January 2021.
What’s more, the unemployment rate has risen for the past three months. By inching up to 4.3% in July, it crossed a tripwire that historically has signaled an economy in recession.
This is the so-called Sahm Rule, named for the former Fed economist who came up with it: Claudia Sahm.
She found that a recession is almost always already underway if the unemployment rate (based on a three-month moving average) rises by half a percentage point from its low of the past year.
It’s been triggered in every US recession since 1970. And it’s had only two false positives since 1959; in both of those cases — in 1959 and 1969 — it was just premature, going off a few months before a downturn began.
Still, Sahm, now chief economist at the investment firm New Century Advisors, said that this time “a recession is not imminent’’ despite unemployment crossing the Sahm Rule threshold.
Many economists believe that today’s rising unemployment rates reveal an influx of new workers into the American labor force who sometimes need time to find work, rather than a worrisome increase in job losses.
“Labor demand is slowing,’’ said Matthew Martin, US economist at Oxford Economics, “but companies are not laying off workers in large numbers, which reduces the odds of a negative feedback loop of rising unemployment leading to income loss, reduction in spending, and more layoffs.’’
Indeed, new Labor Department data this week showed that layoffs dropped in June to the lowest level in more than a year and a half.
America’s jobs numbers have been unsettled by an unexpected surge in immigration — much of it illegal — over the past couple of years.
The new arrivals have poured into the American labor force and helped ease labor shortages across the economy — but not all of them have found jobs right away, pushing up the jobless rate.
Moreover, people who have entered the country illegally are less inclined to respond to the Labor Department’s jobs survey, meaning they can go uncounted as employed, notes Oxford’s Martin.
Nonetheless, Sahm remains concerned about the hiring slowdown, noting that a deteriorating job market can feed on itself.
“Once you have a certain momentum going to the downside, it often can get going,’’ Sahm said. The Sahm rule, she says, is “not working like it usually does, but it shouldn’t be ignored.’’
Sahm urged Fed policymakers to preemptively cut their benchmark interest rate at their meeting this week, but they chose to leave it unchanged at the highest level in 23 years.
The Fed raised the rate 11 times in 2022 and 2023 to battle rising prices.
Inflation has duly fallen — to 3% in June from 9.1% two years earlier.
But it remains above the Fed’s 2% target and policymakers want to see more evidence it’s continuing to come down before they start cutting rates.
Still, they are widely expected to make the first cut at their next meeting in September.
With Post Wires
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