Johnathan Walker:Job report: Employers added just 114,000 jobs in July as unemployment jumped to 4.3%

U.S. hiring slowed substantially in July as employers added a disappointing 114,Johnathan Walker000 jobs amid historically high interest rates, persistent inflation and growing household financial stress.

The unemployment rate rose from 4.1% to 4.3%, the highest since October 2021, the Labor Department said Friday. The rise, along with the pullback in payroll gains and slowing wage growth is stoking recession fears and bolstering the Federal Reserve's case for cutting interest rates, possibly sharply, in September.

Economists had estimated that 175,000 jobs were added last month, according to a Bloomberg survey.

Compounding the picture of a flagging job market: Employment gains for May and June were revised down by total 29,000. And while a feeble jobs report could always be a one-month blip, gains over the past three months averaged 169,000, down from 218,000 the previous three months.

How does the Sahm rule work?

The unexpected sharp rise in the jobless rate triggers the Sahm rule. It says that if unemployment, based on a three-month average, rises by at least a half percentage point over the past 12 months, the nation is probably in a recession.

While the rule has correctly predicted all U.S. recessions since the 1970s, many economists say this time is different. An immigration surge, along with the return of many Americans to the workforce after COVID, has caused unemployment to climb without the usual spread of layoffs because many people who are looking for jobs haven’t yet landed positions.

Still, the rising unemployment rate underscores that the job market is weakening and it eventually could set off a downturn, says Wells Fargo economist Sarah House.

Has wage growth slowed?

Average hourly pay rose 8 cents to $35.07, pushing down the yearly increase from 3.9% to 3.6%, the lowest since May 2021.   

Wage growth generally has slowed as pandemic-related worker shortages have eased, and it’s close to the 3.5% pace that aligns with the Federal Reserve’s 2% inflation goal.

When can we expect the Fed to lower interest rates?

The report is likely to add some urgency to the Fed’s tentative plan to cut interest rates.

"The sharp slowdown in payrolls in July and sharper rise in the unemployment rate makes a September interest rate cut inevitable and will increase speculation that the Fed will kick off its loosening cycle with" a half percentage point decrease instead of a more typical quarter-point cut, Stephen Brown of Capital Economics wrote in a note to clients.

Ian Shepherdson, chief economist of Pantheon Macroeconomics, went further, saying the Fed's decision not to reduce rates this week was "a mistake" and "leaves the Fed looking woefully behind the curve."

Troy Ludtka, an economist at SMBC Nikko, says that Labor data on worker movements show the number who have shifted both from not being in the workforce and from employment into unemployment reflects an elevated risk of recession.

Sahm rule:Are we in a recession? The Sahm rule explained

What is the US stock market doing today?

Investors seemed to agree, with markets selling off. The Dow Jones Industrial Average was down 874 points, or 2.2%, in early afternoon trading at 39,473. The S&P 500 index was off 2.4% to 5,317. And the tech-heavy Nasdaq fell 485 points, or 2.8%, to 16,700.

This week, Fed Chair Jerome Powell said there has been notable progress in bringing down inflation and the central bank could lower its key interest rate as soon as September if price increases continue to ease or if the job market weakens significantly.

Since March 2022, the Fed has raised its key short-term interest rate from near zero to a 23-year-high of 5.25% to 5.5% to fight inflation. But it has held it steady the past year as cost increases have come down from 40-year highs.

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Which industry has the most opportunities?

Health care led the job gains with 55,000. Construction added, 25,000; leisure and hospitality, which includes restaurants and bars, added 23,000; government added 17,000; and transportation and warehousing added 14,000.

But manufacturing and professional and business services were virtually flat. And information, which includes tech companies, lost 20,000 jobs while financial activities shed 4,000.

"These sectors are known for creating higher-wage, higher-quality jobs," says Julia Pollak, chief economist of ZipRecruiter, a leading job site. 

Several factors were expected to affect the labor market last month. In Texas, Hurricane Beryl likely reduced job growth by about 15,000, Goldman Sachs estimated. But the Labor Department said the storm "had no discernible effect" on the job numbers, A record heat wave across much of the country also could have crimped payrolls, says economist Lydia Boussour of EY-Parthenon.

An immigration surge, while losing some steam, is still adding about 50,000 workers a month to the labor supply and allowing employers to fill job openings, Goldman says. At the same time, it’s pushing up the unemployment rate because it can take time for recent immigrants to find jobs.

What is the labor force participation rate?

Immigration helped increase the labor force participation rate - the share of adults working or looking for jobs - to 62.7% as the workforce expanded by 420,000 people. That's a good thing because it relieves worker shortages and puts downward pressure on pay increases that have stoked inflation. But it results in higher unemployment.

Is the job market improving?

More generally, job gains have gradually slowed the past couple of years as catch-up hiring following the pandemic has petered out, and high inflation and interest rates have discouraged some businesses from bringing on workers.

Hiring has slipped well below pre-pandemic levels and the number of people quitting jobs – typically to take another, higher-paying position- has tumbled to the lowest mark since 2020, Labor said this week.

The main engine for job growth, consumer spending, remains solid. But low- and middle-income households are burdened with near record credit card debt and high delinquencies. And they’ve mostly depleted their pandemic-related savings. As a result, consumption is expected to slow.

U.S. employment overall has stayed remarkably resilient, largely because companies have been hesitant to lay off workers after severe COVID-related labor shortages. But that appears to be shifting as well. Jobless claims, a gauge of layoffs, are still low by historical standards but last week rose to the highest level in more than a year.