The effect of the job market on the economy

The U.S. job market showed signs of weakness in July, with the growth of new jobs slowing and the unemployment rate ticking higher. In addition, Americans filing new unemployment claims also rose at the end of the month. In early August, investors appeared to read this flurry of softer labor market data as an , with .

The latest jobs data arrived just after the Federal Reserve voted to , maintaining the fed funds target rate at a range of 5.25% to 5.50%, the same level as the past year. The Fed indicated that the door was open to an interest rate cut at its next meeting in mid-September. Investors initial reaction in the wake of jobs data released in early August indicates a fear that the Fed waited too long to initiate rate cuts.

The U.S. Bureau of Labor Statistics reported that the economy created only 114,000 new jobs in July, the second lowest monthly gain in more than four years (behind April 2024when only 108,000 jobs were created). In addition, the labor department revised lower June’s impressive job growth figure. What was initially reported as a 206,000 job gain in June was revised to 179,000.

While job growth slowed, the nation’s unemployment rate rose to 4.3%, its highest level since October 2021. “The market’s worry with the unemployment rate is that historically, once it begins rising, it tends to keep rising,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Still, when taking a more historical view of the unemployment rate, a number in the low 4% range is still quite favorable.”

Solid but slower job growth

Over 2024’s first seven months, non-farm payrolls grew by an average of 202,714 jobs per month, continuing a downward trend since the economy began to emerge from the COVID-19 outbreak in the early 2020s. The slowdown in job growth is even more evident in the most recent three months of jobs data, where monthly job gains averaged less than 170,000.

The most notable June job gains occurred in healthcare, construction, and transportation and warehousing.

The unemployment rate was below 4% from February of 2022 through April 2024, but has drifted higher, above 4%, since.

The number of open positions compared to available workers, which was significantly imbalanced, with far more jobs than workers, recently leveled off. At the end of June 2024, according to the U.S. Bureau of Labor Statistics, there were 8.2 million job openings in the U.S., compared to 7.2 million unemployed persons. The number of job openings trended lower in 2024 but stabilized in recent months. “Today’s imbalance still favors workers, and that helped keep wage pressures elevated,” says Haworth.

“Improving labor participation is one way to address the tightness in the labor market that’s propping up wage gains,”

- Matt Schoeppner, senior economist at U.S. Bank.

One measure economists watch to forecast potential changes in labor market trends is the weekly new jobless claims report. In the most recent report, initial jobless claims stood at 249,000 for the week ending July 27. It marked 2024’s highest weekly jobless claims level, though the number is subject to significant fluctuation on a week-to-week basis. “If you look at long-term history, sub-300,000 initial weekly jobless claims is considered a fairly healthy level for the economy,” says Haworth. “At the same time, recent reports show people aren’t leaving jobs at the rate they once were. That’s an early signal of a slightly softer labor market.”

July’s labor force participation rate, representing the percentage of the population currently in the workforce, was 62.7%, generally consistent with the rate throughout 2024. Labor force participation is considered a key barometer of the broader economy’s health. The labor force participation rate was slightly higher, at 62.8%, between August and November 2023. “Improving labor participation is one way to address tightness in the labor market that’s propping up wage gains,” says Matt Schoeppner, a senior economist at U.S. Bank.

Watching for the Fed’s response

The recent labor market slowdown occurred despite continued U.S. economic resilience. The nation’s Gross Domestic Product (GDP), grew at an annualized rate of 2.8% in 2024’s second quarter, double the first quarter’s GDP growth. However, the economy is expected to slow from 2023’s 2.5% growth pace. Inflation, which was stuck at a 3%+ annual level for more than a year (based on the Consumer Price Index) trended lower in recent months, down to 3% for the 12 months ending in June.

Haworth notes that the Fed is closely monitoring average monthly wage growth, which dropped to 3.6% for the 12 months ending in July, down considerably from wage growth levels in recent years. “This is a key measure that may give the that inflation is moving in the right direction,” says Haworth.

Fed Chair Jerome Powell, after the FOMC’s July meeting, said “conditions in the labor market have returned to about where they stood on the eve of the (COVID-19) pandemic (in 2020) – strong, but not overheated.” Powell added, “If the labor market were to weaken unexpectedly or were to retreat slower than anticipated, we are prepared to respond.” That appeared to open the door to potential Fed interest rate cuts in the coming months, particularly given the most recent jobs report.

What to expect going forward

Investors continue to closely follow jobs data for signs of a more significant slowdown, which could provide the Fed with the impetus to begin cutting interest rates. Lower rates are considered a way to provide a boost to the economy, which would likely help extend the that began in 2023, and also boost the bond market.