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US jobs growth was weaker than forecast in July and was revised lower for the previous two months, with the labour market cooling after almost 18 months of interest rate rises.
The economy added 187,000 new non-farm jobs, according to data released by the Bureau of Labor Statistics on Friday, compared with forecasts of 200,000.
That followed a downwardly revised 185,000 in June, while May’s figure was trimmed to 281,000. Together, the past three months could be taken as an encouraging sign that the Federal Reserve is making progress in its fight against inflation.
However, the labour market more broadly was still in robust shape, with the unemployment rate dipping to 3.5 per cent.
Hourly earnings growth was stronger than expected at 4.4 per cent year on year, well above the levels considered consistent with the Fed’s 2 per cent inflation target. Wages grew 0.4 per cent month on month, compared with consensus forecasts of 0.3 per cent.
Andrew Patterson, senior economist at Vanguard, said: “There are signs of softening in the headline numbers, so that is progress . . . but wage growth remains concerning, the Fed is not going to be complacent about that. We believe they have more work to do.”
The Fed and investors have been closely monitoring the health of the labour market, as wages and jobs growth are critical contributors to inflation.
Optimism had grown in recent weeks that the central bank is on track to bring inflation under control without driving the economy into a severe recession. Consumer price inflation fell further than expected in June, while the central bank’s preferred indicator — the personal consumption expenditure index — retreated to its lowest level since March 2021.
However, the Fed has warned that persistent strength in the labour market may make it harder to bring inflation all the way down to its target.
“I think markets have been overly optimistic with the last sets of inflation numbers,” said Agron Nicaj, US economist at MUFG. “As long as consumer spending remains high and the labour market remains strong, I would expect inflation to remain elevated.”
Job gains in July were particularly strong in the healthcare, financial services and wholesale trade industries.
Manufacturing employment slipped by 2,000. A survey by the Institute for Supply Management this week suggested activity in the politically important sector was contracting. Nicaj said July’s decline was within the margin of error and should be treated as essentially flat, but said “a lot of signs suggest that it will be one of the first industries to have consistently negative employment growth”.
The Fed last week lifted interest rates to their highest level in 22 years and insisted it may announce further increases if required, but futures markets suggest most investors think the central bank will hold rates steady for the rest of the year.
Markets on Friday morning were pricing in just a 17 per cent chance that the Fed lifts rates at its next meeting in September, and about a 37 per cent chance that rates rise at least once by November, little changed compared with before the jobs data was released.
Bond markets rallied on Friday following the jobs data release, as investors weighed the weaker headline figure with the stronger unemployment rate. After a brief jump, the 10-year Treasury yield fell to 4.04 per cent in afternoon trading, a 0.15 percentage point decline. Stocks erased early gains, leaving the S&P 500 down 0.5 per cent at the closing bell.
Additional reporting by Kate Duguid in New York