U.S. July jobs report: Gradual and orderly cooling in the labor market

REAL ECONOMY BLOG | August 04, 2023

Authored by RSM US LLP

After a lengthy period of outsized gains, the American labor market is now cooling in a gradual and orderly fashion in line with the Federal Reserve’s goals, which points to a growing probability of a soft landing for the economy.

The 187,000 net change in total employment in July, which was accompanied by a downward revision of 49,000 for the previous two months and a 3.5% unemployment rate in July, shows cooling demand by firms as the economy grows near its 1.8% long-term trend.

In addition, wage growth now stands well above the pace of inflation, which means real wage growth and bolsters the spending outlook heading into the final four months of the year. One thinks that despite the heat, Americans are enjoying a splendid summer and that should be illustrated by outlays on travel and services in August.

Job gains continue to be clustered in higher-paying professions, and that was reflected in the 0.4% gain in average hourly earnings monthly and 4.4% from one year ago.

The household survey implied a net change in employment of 268,000 while the overall employment participation rate remained unchanged at 62%.

There are currently 167,103,000 people working in the United States. There are 5.2 million individuals who want a job and are not employed and 4 million who are working part time for economic reasons.

Given that there are 9.58 million jobs available, we continue to ask: Where are we going to find the workers to modernize the national infrastructure, manufacturing complex and the much larger service sector? We think that this is a major portion of the policy narrative that continues to be overlooked and demands attention.

The labor force participation rate among prime-age workers stands at 83.4%. Among men in that group, the rate stands at 89.4% in contrast with the 77.5% rate among women.

The median duration of unemployment remained unchanged at 8.7 weeks, which is indicative of the tight labor market and implies that those who lose a job are finding one quite quickly even as the overall demand for labor cools.

Policy implications

The July jobs report will not materially change the direction of monetary policy out of the Federal Reserve. We expect that the Fed will not change the federal funds policy rate, which is currently a range between 5.25% and 5.5%, at its September meeting.

At this point, given the cooling in the labor market and overall inflation, we do not expect a change at the November meeting and the current rate likely represents the peak in the business cycle.

The data

Total private sector hiring increased by 172,000 while government hiring advanced by 15,000. Goods-producing jobs increased by 18,000 and an additional 19,000 jobs in construction were created in July. Manufacturing hiring declined by 2,000.

The service sector added 154,000 jobs, which was primarily driven by 100,000 jobs created in private education and health care sectors. Trade and transport added 18,000, retail trade 9,000, finance 19,000, and the leisure and hospitality ecosystem 17,000. The information sector saw a net decline of 12,000, and there were 22,000 fewer temporary jobs in July

Hours worked declined by 0.3% in July and total private hours worked stands at 34.3. Aggregate hours worked eased to 115.1 from 115.3 or declined by 0.2%.

The takeaway

Demand for labor remains solid but is clearly cooling compared to the torrid pace in 2021 and 2022. Any way one slices it, the U.S. labor market remains tight and there continues to be a shortage of workers compared to jobs available.

The 3.5% unemployment rate and 4.4% average hourly earnings rate reflect those dynamics. While we think bargaining power is slowly shifting from labor to management, wage growth now stands above the pace of inflation which means real wage growth. That should facilitate a change in public sentiment, which remains sour on the overall economy.