If the country is heading into a recession, employers haven’t gotten the memo.
The US economy created 528,000 jobs in July, the Labor Department said on Friday, a confoundingly robust gain that pushed total employment back to its pre-COVID level. The unemployment rate dipped to 3.5 percent, matching a five-decade low last seen just before pandemic lockdowns began in March 2020.
Last month’s hiring binge — the increase was double most forecasts — came as soaring prices for products and services have rattled consumers and businesses, and other indicators point to a possible recession. It was especially remarkable given that the labor force, or pool of available workers, shrank in July, extending a worrying post-pandemic trend.
The tight labor market puts more pressure on the Federal Reserve to continue aggressively raising interest rates to cool the worst inflation since the early 1980s. Wage growth, a key inflation concern, ticked up from June.
“It’s good news for a lot of people who got jobs,” said Laura Veldkamp, an economist at Columbia Business School. “It’s bad news because it means more rate increases.”
Stock prices eased as hope faded that a weakening economy — coupled with falling gasoline prices and a unwinding of the computer chip shortage — would undercut inflation, giving the Fed the flexibility to go lighter on rate increases. US Treasuries fell, pushing yields higher.
Investors now expect Fed officials to approve a third straight rate hike of three-quarters of a percentage point when they meet in September. That would put the Fed’s rate at 3 percent, up from near-zero in March.
“We’re starting to create a price-wage spiral,” Veldkamp said, referring to a dangerous cycle in which workers seek higher pay to offset rising prices, and businesses boost prices to cover higher payroll costs.
Wages rose more than 5 percent over the past 12 months. That’s well above the Fed’s comfort level of about 4 percent, despite not being high enough to keep pace with inflation.
The risk, of course, is that central bank policy makers trigger a recession by ramping up rates too much and too quickly.
There are plenty of signs that higher rates already are taking a toll on the economy. Business investment in factories and equipment fell in the April through June quarter, as did new home construction and government spending. Gross domestic product, the broadest measure of the economy, has declined for two consecutive quarters.
While that’s a common definition of a recession, a key reason for the contraction — a drop in inventories — likely reflected pandemic disruptions to supply chains and a shift by consumers to more spending on services and less on goods.
Economists say it’s virtually impossible to be in a recession with employers hiring so rapidly.
“The acceleration in private sector hiring in July indicates that the underlying fundamentals of the economy are still solid,” said Brian Bethune, an economist at Boston College.
Some of the discrepancy between hiring and declining economic output can be explained by the peculiar nature of this labor market.
Economists said employers remained eager to hire despite the shortage of workers and threat of a recession because they need to rebuild their depleted workforces for the longer term. That’s especially true in services industries such as restaurants, hotels, and health care — which are dominated by jobs with lower wages and lower productivity.
Employers have added an average of 470,000 jobs each month this year. That’s down from 560,000 a month in 2021 but is a robust pace nonetheless.
It’s also surprising in light of a smaller pool of workers, the result of retirements, career swapping, and lingering concerns about COVID.
Labor force participation rate — the percentage of adults with a job or looking for one — declined a tick in July to 62.1 percent. In February 2020, the rate was 63.4 percent. However, among workers ages 25 to 54, participation inched higher.
July’s job gains were widespread, the Labor Department said, led by leisure and hospitality and professional and business services.
The United States has now recouped the 22 million jobs lost during March and April 2020. But the recovery has been uneven across industries.
There are 1.2 million fewer workers in leisure and hospitality than in February 2020, and 597,000 fewer government workers. Employment in professional and business services is up by 986,000, while transportation and warehousing has expanded by 745,000 jobs.
The pandemic has scrambled the economy in ways that have made forecasting even harder than it was before COVID. Last month, Federal Reserve chairman Jerome Powell acknowledged just how unsure he and his colleagues were about the impact of higher interest rates and how quickly they could bring down inflation.
“We’re going to have to watch the data carefully,” he told reporters.
The Consumer Price Index for July will be released on Wednesday, and a widely followed survey of consumer sentiment comes out two days later.
For now, the strength of the job market and wage growth reflected in Friday’s report suggest inflation hasn’t peaked yet. And unless the data change meaningfully in coming weeks, Powell’s next move is clear.
“The Fed won’t take any solace in the strong job numbers,” said Mark Zandi, chief economist at Moody’s Analytics. “Policymakers’ priority is cooling wage and price pressures, so they want to see unemployment edge higher. ... The Fed will get what it wants in coming months.”