The U.S. economy sprouted 187,000 additional jobs in July, slightly lower than the 200,000 that many economists had expected and well below 2022’s average of 400,000 a month. 

The unemployment rate edged down to 3.5 percent from 3.6 in June, remaining near historic lows.

Job additions from May were adjusted down to 281,000 and June’s to 185,000. June also saw a trend toward fewer job postings and fewer workers quitting their jobs, indicating the labor market might be returning to a balance.

The labor market’s apparent slowdown also is a sign that the U.S. Federal Reserve’s interest-rate hikes are having their intended effect of curbing the growth of wages and new jobs.

Worker pay grew by 4.4 percent in July, year on year, “well above the levels considered consistent with the Fed’s 2-percent inflation target,” the Financial Times noted. Wages have grown at an annual pace of 4 percent or better for the past two years, The Wall Street Journal reported.

The labor participation rate—the number of people working or actively seeking work—moved up 0.4 of a percent to 62.6 percent, squeaking past the labor department’s projection of 61.5. Among workers in the prime working ages of 25 to 54, the rate was 83.4 percent, more than in the months just before the COVID War began.

Inflation fell to 3 percent in June and the Personal Consumption Expenditures Price Index, the Fed’s key inflation measure, reached its slowest pace since March 2021.

However, the Fed has said repeatedly that the labor market must show clear, consistent signs of cooling before the central bank will concede that inflation has been defeated.

The labor market’s slowing trend means the Fed need not raise rates at its September meeting, Rafael Bostic, president of the Federal Reserve Bank of Atlanta, said in comments quoted by The Wall Street Journal.  

Futures markets increasingly are betting that the Fed will not raise rates again this year.

Health care and social services added 87,100 of July’s new jobs after adding 70,000 in each of May and June. Finance took on another 19,000 workers. Education grew 12,900 new jobs.

Construction also added 19,000 workers, with federal infrastructure funding and incentives for green energy manufacturing projects invigorating the sector.

Leisure and hospitality businesses averaged 67,000 new slots in each of January, February, and March but took on just 17,000 new workers last month, another sign the jobs market is settling down.

Information businesses shed 12,000 workers, with professional and business services dumping 8,000.

The manufacturing sector lost 2,000 jobs. The sector’s business activity is contracting, according to a recent survey by the Institute for Supply Management and is about flat for the year, as are the transport and warehousing industries.

“A lot of signs suggest that [manufacturing] will be one of the first industries to have consistently negative employment growth,” economist Agron Nicaj at MUFG Financial Group told the FT.

About 22,000 temporary workers were cut, which could be an early warning signal that the jobs market is reversing, as it was in the 2001 and 2008 recessions.

Other factors may crimp the jobs market further in the months ahead, the WSJ pointed out: defaults are rising in the bond market, the debt bomb is ticking in the office real estate sector, and student loan payments will resume for tens of millions of workers.

These factors, as well as others including the rising tide of household debt, may force consumers to cut spending and lenders to pare back business loans, both of which could lead to layoffs.

TREND FORECAST: Companies cutting their temps is an early warning sign.

As the Fed’s higher interest rates work their way through the economy and consumers continue to buy less stuff and spend on fewer services, the U.S. will enter a recession.

Minus a wild card, recession should not be long or severe if current trends continue. However, it will be enough to bring the labor market back into balance enough to satisfy the Fed.

As for whether or not the Fed will lower interest rates… it’s essentially a guessing game at this point. Indeed, on Monday, Fed Governor Michelle Bowman said more rate hikes were needed to bring down inflation while John C. Williams, the New York Fed-head predicted that rates will go down next year.

A lot can happen between now and when they meet again on September 19 and 20. Should the equity markets begin their tumble, as we forecast, they may well lower interest rates and/or at a minimum, pause.