July’s jobs report garnered a lot of headlines and for all the wrong reasons. U.S. businesses added just 114,000 jobs last month, well below expectations of 175,000. Along with a slowdown in hiring, the unemployment rate increased to 4.3%, the highest level in nearly three years.
The labor market is starting to soften after years of record-breaking growth. We aren’t in recession territory, but unemployment is rising, and labor demand isn’t keeping pace.
Sluggish hiring, even though layoffs remain relatively low, means the unemployment rate will keep ticking up until business’ demand for talent keeps up with the supply of workers who are unemployed or new to the labor force.
The unemployment rate has risen 0.5% since March of this year, triggering a recession indicator called the Sahm Rule, named after former Federal Reserve economist Claudia Sahm. The Sahm Rule indicates that a recession may be on the horizon if the current unemployment rate exceeds the lowest unemployment rate over the past 12 months by 0.5 percentage points or more.
This does not mean that we are absolutely headed towards a recession, but the labor market looks a bit weaker today than it was just a month ago.
Digging a little deeper into July’s unemployment reading does give some hope. Last month’s increase in unemployment was driven by job losses from temporary layoffs. Workers experiencing temporary layoff have been given a return date or expect to be recalled to work within six months. Hurricane Beryl, which hit Houston in June, could be behind some of July’s increase in unemployment due to temporary layoffs.
Unfortunately, for talent acquisition leaders, the active talent pool is growing with the number of unemployed workers. However, hiring volumes are starting to slow, it can take longer to fill open roles, and there’s more competition for each open position.
As with every jobs report recently, digging into industry hiring trends really helps to tell the full story. In July, just five industries combined to add 142,000 jobs. That means the other industries combined to lose 28,000 jobs. When you do the math, most industries are treading water – not experiencing big layoffs or job losses but not expanding.
Once again, government (+17,000) and healthcare (+55,000) are adding jobs at a robust pace, but that leaves private-sector hiring stagnant month-over-month. The other bright spot was construction, which added 25,000 jobs last month. Despite high interest rates making borrowing more expensive, all construction subsectors added jobs.
In contrast to construction, the information sector lost 20,000 jobs in July. The wide-ranging information industry includes several subsectors that have faced major challenges and job losses over the past year – tech companies (web search portals, computing infrastructure, and data providers), entertainment (motion picture recording), and media (publishing and broadcasting).
There’s a reason the soft landing airplane metaphor has taken off regarding economic recovery. Both flying a plane and managing the U.S. economy require incredible balance and patience—one little thing going wrong can lead to some big problems.
The Fed manages the U.S. economy through its dual mandate to keep inflation down and employment up. When either or both is out of balance, the Fed will adjust interest rates. Lowering rates reduces borrowing costs and encourages spending to spur the economy. As we’ve seen since 2022, raising interest rates slows the economy to stem inflation. Inflation has come down from 9.1% year-over-year in June 2022 to 2.9% this July, above the Fed’s 2% inflation target.
The Fed opted not to lower interest rates at their last meeting in July, and that decision to delay a rate cut could prove challenging for the U.S. economy if July’s lackluster jobs report becomes a trend. Recent labor market data all but guarantees a rate cut at the Fed’s next meeting in September.
I always try to end this article on a positive note, even when things are uncertain. This month, the silver lining in economic reports is consumer spending.
Despite more pessimistic headlines, declines in hiring, and an increase in unemployment, consumers are still spending money. In July, retail sales increased by 1% from the previous month, and this report contained a lot of good news.
Retail sales are not adjusted for inflation. Over the past couple of years, much of the increase in spending could be attributed to the fact that things cost more. But with inflation starting to cool, an increase in retail sales shows that consumers are spending money that can stretch a bit further than it did just a couple of years ago.
While consumer spending has continued to outperform expectations, that boon to the economy could be under threat if the labor market and unemployment rate continue their current trajectory.
