US job growth is at least in 2-1/2 years; the labor market remains tight

WASHINGTON, July 7 (Reuters) – The U.S. economy added the fewest jobs in 2-1/2 years in June, but persistently strong wage growth pointed to continued tight labor market conditions that all but ensure the Federal Reserve will resume raising interest rates later this month.

The Labor Department’s closely watched employment report on Friday also showed 110,000 fewer jobs were created in April and May, indicating that higher borrowing costs were starting to dampen the appetite of businesses to continue adding to the workforce. There was also a jump in the number of people working part-time for financial reasons last month, including because their hours had been reduced due to slack work or business conditions.

Still, the pace of job growth remains strong by historical norms and added to data this week showing an acceleration in service sector activity, suggesting the economy was nowhere near a prolonged recession.

“The wage numbers showed a hint of weakness, but the labor market remains strong,” said Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting. “The Fed’s work is by no means done. We are in a protracted battle against inflation, and nothing in today’s report suggests otherwise.”

Nonfarm payrolls rose by 209,000 jobs last month, the smallest increase since December 2020, the survey of businesses showed. Economists polled by Reuters had predicted that payrolls would increase by 225,000. It was the first time in 15 months that payrolls missed expectations.

Job growth averaged 278,000 per month in the first half of the year. The economy must create 70,000-100,000 jobs per month to keep up with the growth in the working-age population.

Employment growth is driven in part by companies hoarding workers, a legacy of the severe labor shortages experienced as the economy recovered from the downturn of the COVID-19 pandemic in 2021 and early 2022.

While higher-paying industries such as technology and finance are shedding workers, sectors such as leisure and hospitality as well as municipal education are still taking in after losing employees and experiencing accelerated retirements during the pandemic.

Public employment rose by 60,000, boosted by a 59,000 increase in state and local government payrolls. Public employment is still 161,000 below pre-pandemic levels.

Private wages increased by 149,000, also the smallest gain since December 2020. Health care wages increased by 41,000, reflecting increases in employment at hospitals, nursing and residential facilities, and home health services.

Employment in the construction industry rose by 23,000. The housing market is showing signs of revival after being hit by an increase in mortgage interest rates. The Fed has raised its key interest rate by 500 basis points since March 2022, when it began its fastest monetary tightening campaign in more than 40 years.

There was also an increase in employment in professional and business services, although temporary help, seen as a harbinger of future employment, fell by 12,600. Manufacturing payrolls rebounded moderately as the sector struggles to curb demand. However, retail jobs fell by 11,200.

Leisure and hospitality wages increased by 21,000. However, the pace has slowed from the first quarter. Demand may either be slowing or companies are having trouble finding workers, as suggested in the Institute for Supply Management’s June survey, which found that some service companies reported being “unable to find qualified candidates for some open positions.”

There were 1.6 job vacancies for every unemployed person in May, public data showed on Thursday. Employment in leisure and hospitality is still 369,000 below pre-pandemic levels.

Stocks on Wall Street were mixed. The dollar fell against a basket of currencies as US Treasuries rose.

STRONG WAGE PROFITS

With workers still scarce in some industries, average hourly earnings rose 0.4% after climbing by the same margin in May. That kept annual wage growth at 4.4% in June, too high to be in line with the Fed’s 2% inflation target.

The average working week rose to 34.4 hours from 34.3 hours in May. However, it is below the average of 34.6 hours in January.

“Companies continue to retain and grow their workforce but are not increasing weekly hours,” said Selcuk Eren, senior economist at the Conference Board in Washington. “It is consistent with CEOs in a slowing economy choosing to keep workers, potentially with reduced hours, rather than let them go for fear of future hiring difficulties.”

Labor hoarding is helping the economy stave off a recession, but at the expense of productivity, which fell in the first quarter, and profit margins. Economists see companies using the ax if the pressure on profits increases.

The household survey from which unemployment is derived showed that employment rose by 273,000, reversing the decline of 310,000 in May. That more than offset an increase in the number of people entering the workforce.

As a result, the unemployment rate fell to 3.6% in June from a seven-month high of 3.7% in May. Unemployment has remained in a range of 3.4%-3.7% since March 2022.

But the number of people employed part-time for financial reasons rose by 452,000 to 4.2 million, partly reflecting an increase in those who had their hours cut due to slack work or business conditions.

The labor force participation rate, or the share of working-age Americans who have a job or are looking for one, was unchanged at 62.6% for the fourth straight month. But the participation rate for the 25-54 age group rose to 83.5%, the highest level since May 2002, from 83.4% in May.

“While the demand for labor remains unmatched, the labor shortage that employers were sighing over a year ago has definitely eased somewhat,” said Andrew Flowers, chief labor economist at Appcast. “This strong job market has drawn workers in from the sidelines.”

Reporting by Lucia Mutikani; Editing by Daniel Wallis, Chizu Nomiyama and Andrea Ricci

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