FILE - A construction worker carries scaffolding parts on March 14, 2024, in Boston. On Friday, August 2, 2024, the U.S. government issues its July jobs report. (AP Photo/Michael Dwyer, File)
WASHINGTON (AP) – The U.S. economy suffered an unexpected setback in July as hiring fell sharply and the unemployment rate rose for the fourth straight month with raised interest rates taking a toll on businesses and households.
Employers added just 114,000 jobs in July – 35% fewer than expected – and unemployment, now at 4.3%, is the highest since October 2021, the Labor Department reported Friday.
“Things are deteriorating quickly,” said Julia Pollak, chief economist at ZipRecruiter.
The sharp downturn in U.S. hiring shook financial markets around the world. The Dow Jones Industrial Average dropped 610 points, or 1.5%. The S&P 500 tumbled 1.8%.
The sturdy U.S. economy has been a key driver of global economic growth and the U.S. jobs market has been the fuel, giving Americans the confidence and financial wherewithal to keep spending.
The unemployment rate’s jump to 4.3% in July crossed a tripwire that historically has signaled recession – though economists say the gauge probably is not reliable in the post-pandemic economy.
Hiring may have been disrupted by Hurricane Beryl, which slammed the Texas economy last month. And ZipRecruiter’s Pollak noted employers have cut worker hours and made temporary layoffs – suggesting that they are optimistic a rate cut may turn things around.
“They are just slowing hiring and putting people on temporary layoff, furlough,” Pollak said. “They want to get back to business. They see lots of opportunities to expand. They they just need rates to be (lower).”
The Federal Reserve said this week that in needed to see more evidence inflation is moving toward its 2% target before it cuts rates. Chair Jerome Powell characterized the American job market as healthy despite calls for the central bank to begin lowering its benchmark rate, which stands at a 23-year high.
Hourly wages rose just 3.6% from July 2023, the smallest year-over-year gain since May 2021, and another sign that inflation could be heading closer to the Fed’s target.
July job gains were concentrated in a few industries. Healthcare and social assistance firms added 64,000 jobs last month, accounting for 56% of hiring. Restaurants, hotels and bars added nearly 26,000 jobs.
Labor Department revisions, however, clipped 29,000 jobs from May-June payrolls. This year, the economy has generated nearly 203,000 jobs a month, solid but down from 251,000 last year, 377,000 in 2022 and a record 604,000 in 2021, when the job market roared back from pandemic lockdowns.
The economy is weighing heavily on voters’ minds ahead of the November presidential election. Many Americans have been unimpressed after three years of strong job gains, exasperated instead by high prices. Two years after inflation hit a four-decade high, price increases have eased but consumers are still paying 19% more for goods and services than they were in spring 2021.
The so-called Sahm Rule, named for the former Fed economist who came up with it, Claudia Sahm, holds that a recession is almost always already underway if the unemployment rate (based on a three-month moving average) rises by half a percentage point from its low of the past year. The jump to 4.3% unemployment crosses that threshold.
Still, Sahm, now chief economist at New Century Advisors, said before Friday’s report that this time “a recession is not imminent” even if the Sahm Rule were triggered. That is partly because America’s jobs numbers have been upended by an unexpected surge in immigration – much of it illegal – over the past couple of years.
The new arrivals have poured into the American labor force and eased labor shortages across the economy – but not all have found jobs right away, pushing up unemployment. People who have entered the country illegally are also less inclined to respond to Labor Department surveys, meaning they may go uncounted as employed.
On Wednesday, the Fed signaled that it would likely cut rates in September from its current level of 5.3%. The slowdown in hiring has spurred calls from economists and Wall Street for a half-point cut by the Fed, rather than the more traditional quarter-point.
Powell downplayed that possibility Wednesday, though he did not rule it out.
A break on borrowing costs could not come soon enough for many business owners.
Chris Maher is CEO OceanFirst Bank in Red Bank, New Jersey, which works with 20,000 small businesses from restaurants and hotels to car dealerships. Maher said those businesses have pulled back on hiring since Memorial Day as its customers grow more cautious.
A Fed rate cut in September could boost businesses like home construction and car dealerships by cutting the cost of loans, leading to a pickup in hiring, Maher said, but he remains cautious.
At the Barrel Room, a San Francisco wine bar and restaurant, founder Sarah Trubnick is puzzled by what’s happening with the economy. After an “insanely busy” first three months of 2024, she had high hopes for the rest of the year. But business plummeted over the summer, and she doesn’t know why.
She had to lay off four workers and now has 10 at the business she founded in 2011.
“We had been in business for many years,” she said. “So we were very familiar with the patterns, and we knew when to bring on more people, when to expect difficult times. And we knew we had to have a financial cushion at times. We had it all down to a science. And post-COVID I can’t figure out the pattern.”
The Labor Department reported Thursday that 1.88 million Americans were collecting unemployment benefits the week of July 20, most since November 2021 ““ and a sign that those without a job are likely struggling to find a new one.
Julian Cannon, 34, of New York lost his job as a reporter at a online publication back in December. He’s applied for hundreds of jobs with no luck. One company interviewed him eight times for several positions, then ended up hiring a candidate who already worked there. “I’m still looking, and I’m at a breaking point,” he said.
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AP Retail Writer Anne D’Innocenzio in New York contributed to this report.
