July Employment Grows Modestly, But Economic Warning Signs Emerge

The U.S. Bureau of Labor Statistics (BLS) reported a modest increase in total nonfarm payroll employment by 187,000 in July, with unemployment remaining steady at 3.5%. The increase was primarily driven by gains in industries such as health care, social assistance, financial activities, and wholesale trade.

Health care led the growth with 63,000 new jobs, while construction employment trended up by 19,000, largely in the residential contractor space, reflecting an increase in home building and improvement activity due to housing inventory shortages.

However, the diffusion index, which measures the breadth of payroll growth across industries, was at 57.2% – the sixth consecutive month below 60%. This narrower band of sectors adding jobs historically aligns with recessions or weakening economic growth.

Earlier this week, ADP reported private sector jobs increased by 324,000. Annual pay was up 6.2% year over year,

The May and June BLS employment figures were revised by 49,000 jobs, indicating slower growth than previously reported. The incoming data continued to send mixed signals about the economy's strength, with lackluster manufacturing and service sector health, lower inflation measures, but stronger than expected GDP growth in Q2.

Average hourly earnings rose by 14 cents to $33.74, marking a 4.4% increase over the past 12 months. The average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour to 34.3 hours.

Mortgage Banker Association’s Deputy Chief Economist Joel Kan expressed concerns over weakening job growth but noted that wage growth remained steady. He also anticipated that the Federal Reserve would keep the federal funds target at its current level due to the declining inflation trend.

The mixed employment data illustrates a complex economic picture, where growth in certain sectors is countered by stagnation in others. The ongoing challenges in leisure and hospitality, which remain below their pre-pandemic levels, emphasize the uneven nature of the economic recovery.

Unsurprisingly, construction jobs saw growth. First American Economist Ksenia Potapov said, "Employment in this interest-rate sensitive sector continued to trend up in July. Residential construction is defying expectations, largely because of how little housing supply is available for sale. Compared with pre-pandemic levels, residential building employment is up 10%."

National Association of Realtor Chief Economist Lawrence Yun said, "The economy is chugging along but is certainly not robust. It could turn into a job-cutting recession if the Fed continues to raise interest rates. If the Fed decides to halt the rate increases, then the housing sector can grow and provide a cushion for the economy."