Why a weaker jobs market is sparking recession fears
The U.S. added far fewer jobs than expected last month, raising worries about a broader economic slowdown.
Employers added just 114,000 jobs in July, according to a report Friday from the Labor Department. That marked a sharp drop from the average monthly gain over the last year.
Meanwhile, the unemployment rate rose to 4.3% in July, the highest level in nearly 3 years.
Here are three things to know about what the jobs report may be showing about the state of the economy.
Why the data is raising recession fears
The U.S. economy has been remarkably resilient over the last year despite the highest interest rates in more than two decades. But the sharp downshift in hiring last month is sparking fears that's about to change.
Employers added just over half as many jobs last month as they had, on average, in the twelve previous months. Job gains for May and June were also revised downwards by a total of 29,000.
While the unemployment rate is still low by historical standards, the three-month average has now risen more than half a percentage point from its 12-month low — a warning sign of a possible recession.
Wage gains also cooled last month. Average wages in July were up 3.6% from a year ago, compared to an increase of 3.9% for the twelve months ending in June. Wages have been growing faster than prices for more than a year, increasing the average worker's real buying power.
Consumer spending is the biggest driver of the overall economy, so any significant drop in buying power could lead to a more widespread economic slowdown.
The jobs report follows an equally gloomy survey of manufacturing managers, which showed new orders and factory output shrinking in July. That triggered a stock market selloff on Thursday, which continued on Friday.
The Dow Jones Industrial Average tumbled more than 900 points in early afternoon trading, while the S&P 500 and the Nasdaq also slumped.
Some parts of the economy are clearly limping. Factories added just 1,000 jobs in July. The information sector, which includes publishing, broadcasting and web hosting, was the biggest loser last month, shedding 20,000 jobs.
But construction companies — which are typically sensitive to high borrowing costs — continued to hire at a rapid clip, adding 25,000 jobs in July.
The data is raising concerns about the Fed's approach
The weaker-than-expected jobs report sparked fresh worries that the Federal Reserve has kept interest rates too high for too long in its effort to curb inflation.
The central bank held its benchmark interest rate steady on Wednesday — at the highest level in more than two decades — but signaled that it could begin cutting interest rates at its next meeting in September.
Investors had been expecting a quarter-point rate cut at next month's meeting, but after Friday's jobs report, many are betting on a more aggressive, half-point reduction.
Critics worry that after being slow to raise interest rates three years ago, when prices started climbing rapidly, the Fed has once again failed to pivot in time to avoid a sharper slowdown.
Fed policymakers did say this week that they're keeping a close eye on the job market after a long period in which they were primarily concerned with battling inflation.
But there are some big caveats in the report
While the Labor Department says bad weather did not significantly affect the employment picture, Hurricane Beryl made landfall during the week the jobs numbers were gathered, so some of the job losses may be temporary.
Additionally, the rise in the unemployment rate was primarily driven by a surge of new workers: 420,000 people joined or rejoined the workforce in July, and not all of them found jobs right away. And the share of working-age people who are either working or looking for work rose to 84% — the highest level since 2001.
The Fed's next meeting is in mid-September, and policy makers will get another employment report and two additional inflation reports before that, which would provide a fuller picture.
Transcript
ARI SHAPIRO, HOST:
Employers aren't posting as many help wanted signs anymore. Now it's the U.S. economy that may need some help. A new report from the Labor Department shows hiring slowed sharply last month. That's triggering fears that the economy could slide into recession. It sent the stock market into a tailspin. NPR's Scott Horsley is here with more. Hey, Scott.
SCOTT HORSLEY, BYLINE: Hi, Ari.
SHAPIRO: This jobs report today was way weaker than forecasters expected. What's going on?
HORSLEY: Yeah. Employers added only 114,000 jobs last month. That's just over half the average pace of hiring we've seen over the last year, and the job growth in May and June was also revised lower. The other big warning sign in today's report is the unemployment rate ticked up to 4.3%. Now, that's still pretty low by historical standards, but the three-month average unemployment rate has now jumped more than half a point from where it was a year ago. And economist Julia Pollak, who's with the job search website ZipRecruiter, says that's worrisome because typically when unemployment goes up that much, it doesn't stop there. It kind of snowballs.
JULIA POLLAK: Why? Well, because it sets off a negative cycle of job losses leading to declines in consumer spending, leading to declines in business revenue, which leads to more job cuts.
HORSLEY: And investors are clearly worried about that kind of vicious cycle. We saw a big sell-off on Wall Street today with the Dow Jones Industrial Average tumbling more than 600 points, and the tech-heavy Nasdaq sliding into correction territory, meaning it's down 10% from its recent high.
SHAPIRO: Scott, what's behind this big slowdown?
HORSLEY: One obvious suspect is high interest rates. You know, for the last year, the Federal Reserve has kept interest rates at their highest level in more than two decades as it tries to fight inflation. And while inflation has come down, those high borrowing costs have definitely taken a toll on some parts of the economy, particularly the housing market and manufacturing.
You're now starting to hear some critics say the Fed has kept rates too high for too long, putting the economy at risk of recession. Fed Chairman Jerome Powell was asked about that earlier this week.
(SOUNDBITE OF ARCHIVED RECORDING)
JEROME POWELL: Are we worried about a sharper downturn in the labor market? And the answer is we're watching really carefully for that. What we think we're seeing is a normalizing labor market. If it starts to show signs that it's more than that, then we're well positioned to respond.
HORSLEY: After today's jobs report, you're hearing a lot of second guessing that the Fed missed an opportunity to respond when it decided not to cut interest rates earlier this week. Investors do expect the Fed to cut at its next meeting in September. They were already kind of banking on a quarter percentage point rate cut. And after today's report, many investors now think the Fed will act even more aggressively and cut its benchmark rate by half a percentage point in September.
SHAPIRO: Was there any good news in the report?
HORSLEY: Well, there are some reasons to think the bad news might be short-lived. These numbers were gathered the week that Hurricane Beryl made landfall in Texas. So some of the slowdown could turn out to be weather-related and reversible. Julia Pollak notes that there was also a big jump in the number of people on temporary layoff, which suggests they might be called back to work once the Fed does cut interest rates.
POLLAK: What we hear from companies is not that they see, you know, the bottom falling out, not that they see the U.S. consumer falling off a cliff. Many businesses see great opportunities for expansion and growth. They're just not taking them right now because interest rates are prohibitively expensive.
HORSLEY: And average wages are not going up as fast as they were, but they are still going up faster than prices. That means that for now, at least, workers do have money in their pockets to keep spending, and if they do keep spending, that should keep the economy from sliding into a ditch.
SHAPIRO: That's NPR's Scott Horsley. Thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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