Halfway through the year, and four years after the downturn triggered by the coronavirus pandemic, the American jobs engine is still turning — even if it is showing increasing signs of slowing.
Employers had another strong month of hiring in June, the Labor Department reported Friday, adding 206,000 jobs for the 42nd consecutive month of job growth.
At the same time, the unemployment rate rose by a tenth of a point to 4.1%, from 4% previously, and exceeding 4% for the first time since November 2021.
Job creation was slightly better than most analysts had expected. But figures for the previous two months were revised downward, and the rise in unemployment was unexpected. This has led many economists and investors to worry about the development of the jobs market, even though they had full confidence in it.
“These numbers are good,” said Claudia Sahm, chief economist at New Century Advisors, cautioning against interpreting the report too negatively.
But “the importance of the unemployment rate is that it can actually tell us a little bit about where we might be headed,” she added, noting that the rate has been rising since hitting a half-century low of 3.4 percent early last year.
Wage gains have also been moderate. Average hourly earnings rose 0.3% in June from the previous month and 3.9% from a year earlier, compared with a 4.1% year-over-year change in May. But the good news for workers is that wage increases have been outpacing inflation for about a year.
Market reaction to Friday’s report was muted, with stocks rising slightly. Government bond yields, however, fell, reflecting traders’ growing confidence that the Federal Reserve could begin cutting interest rates.
The policy interest rate, which was near zero in early 2022, has now been above 5% for more than a year, as part of the Fed’s efforts to tame inflation. The impact on lending across the economy has persisted longer than many businesses (or households looking to buy a home or car) had anticipated.
Most economists expect a further slowdown in job and wage growth until the Fed acts to ease credit conditions. Signs of a slowdown are mounting.
Layoffs are near record lows, but a metric known as the hiring rate – which tracks the number of hires in a month as a percentage of overall employment – is — has declined significantly, meaning that the relatively few people who lose their jobs generally find it harder to find new opportunities.
Nearly three-quarters of June’s job gains came from health care, social assistance and government. A few other sectors saw small increases, and some, including manufacturing and retail, lost jobs overall.
Much of the government hiring is part of a long-overdue catch-up by states and local governments, which have been struggling with staffing shortages and have only recently returned to their pre-pandemic employment peaks. And the aging of the U.S. population has created a persistently high demand for health care workers and other care-related professions.
Economists, however, tend to feel more confident when the bulk of job creation comes from sectors more representative of private sector dynamics.
“Job openings are down,” said Nick Bunker, director of economic research at the job search site Indeed.
This may partly explain why the number of long-term unemployed (those who have been out of work for 27 weeks or more) is now higher than its 2017-2019 average.
With inflation running at 2.6%, not far from the Fed’s 2% target, some analysts worry that the central bank’s current stance could end up upsetting the labor market. Fed officials have signaled over the past month that they would respond to a sudden weakening in the labor market by cutting rates, which are currently at their highest level in decades.
Fed officials will meet at the end of the month and again in September to set monetary policy. Some investors and financial analysts, reacting to the June jobs figures, said officials should not risk waiting too long.
“Conditions in the labor market are cooling,” said Neil Dutta, head of economic research at Renaissance Macro Research, a financial firm. “The Fed’s tradeoffs have changed. If it doesn’t cut rates this month, it should send a strong signal that a rate cut is coming in September.”
As the financial world awaits the next phase, American households have continued to spend at a brisk, if somewhat moderate, pace. Last month, the Transportation Security Administration screened a record number of travelers at airports. Recent corporate earnings reports suggest that consumers, while more demanding than before, remain generally healthy. The stock market has hit new highs this year, returning an impressive 17%.
In many ways, the financial situation of American households is brighter than it was before the pandemic. At the end of 2019, American households held about $980 billion in “demand deposits” (the sum of cash held in checking, savings, and money market accounts). Today, that figure stands at more than $4 trillion.
While this wealth is broadly concentrated among the richest, the gains in wealth and income have been widespread. The net worth held by the bottom 50% of households, which was about $1.9 trillion on the eve of the pandemic, is now about $3.8 trillion. And for non-managerial workers (about eight in 10 of the workforce), wage growth has been much stronger than the overall average.
For private companies with fewer resources than larger corporations, the economic climate of the past four years has sometimes been a whirlwind of nauseating challenges. Such is the case for brothers Mazen and Afif Baltagi, who own several hospitality businesses in the Houston area (an event space, a sports bar and a couple of coffee shops) as well as a few investment partners.
The crowds aren’t as big as they were in 2021 and 2022, when people were spending more euphorically. And “it’s not an easy business,” Baltagi said, especially as food, labor and construction costs have surged and remained largely elevated.
Yet, from his perspective, “Texas is booming.”
In this interest rate environment, “banks aren’t really lending to restaurants right now,” he added, but he said he and his brother are working around that, winning enough sales — and new equity partners — to undertake future expansions.
This combination of corporate adaptability and profitability is a sample of the strengths that have allowed the United States to avoid the recession that many experts expected. But surveys of business leaders suggest that many are waiting for the cost of credit to fall before embarking on new waves of hiring or capital investment.
The question now is whether the Fed will be able to cut interest rates in time to keep the expansion going. Additional data on consumer prices will prove crucial as the summer progresses.
Financial markets “just need the inflation data to cooperate,” said Samuel Rines, an economist and macroeconomic strategist at WisdomTree, an investment management firm. “Then the game can begin.”