America’s employers slowed their hiring in August in the face of rising interest rates, high inflation and sluggish consumer spending, all of which have weakened the outlook for the economy.
The government reported Friday that the economy added 315,000 jobs last month, down from 526,000 in July and below the average gain of the previous three months. The unemployment rate rose to 3.7 per cent, from a half-century low of 3.5 per cent in July, as more Americans came off the sidelines to look for jobs and didn’t find work immediately.
The smaller August gain will likely be welcomed by the Federal Reserve. The Fed is rapidly raising interest rates to try to cool hiring and wage growth, which have been consistently strong. Businesses typically pass the cost of higher wages on to their customers through higher prices, thereby fueling inflation.
Fed officials hope that by raising borrowing costs across the economy, they can reduce inflation from a near-40-year high. Some economists fear, though, that the Fed is tightening credit so aggressively that it will eventually tip the economy into recession.
Job openings remain high and the pace of layoffs low, indicating that most businesses still want to hire and that the economy isn’t likely in, or even close to, a recession. The broadest measure of the economy’s output — gross domestic product — has shrunk for two straight quarters, meeting one informal definition of a recession.
Most economists, though, don’t think a recession will have begun until the unemployment rate has risen steadily. Even so, worries about a forthcoming recession have grown after Fed Chair Jerome Powell, in a high-profile speech last week, made clear that to curb inflation, the Fed was prepared to continue raising short-term interest rates for the foreseeable future and to keep them elevated. Powell warned that the Fed’s inflation fight would likely cause pain for Americans in the form of a weaker economy and job losses.
The Fed chair also said the job market is “clearly out of balance,” with demand for workers “substantially exceeding” the available supply. Friday’s jobs figures and a report earlier this week that the number of job openings rose in July after three months of declines, suggested that the Fed’s rate hikes so far haven’t restored any such balance. There are roughly two advertised job openings for every unemployed worker.
The central bank has raised its short-term rate to a range of 2.25 per cent to 2.5 per cent this year, after the fastest series of increases since it began using its short-term rate to influence the economy in the early 1990s. It has projected that its key rate will reach a range of 3.25 per cent to 3.5 per cent by year’s end. Those rate hikes have made borrowing and spending steadily more expensive for individuals and businesses. The housing market, in particular, has been weakened by higher loan rates.
The jobs figures are helping fill out the economic backdrop as this fall’s congressional elections intensify. Republicans have pointed to high inflation to try to pummel Democrats in midterm campaigns. The Biden administration has pushed back and claimed credit for a robust pace of job growth.
Wages are rising at their fastest pace in decades as employers scramble to fill jobs at a time when fewer Americans are working or seeking work in the aftermath of the pandemic. Average hourly pay jumped 5.2 per cent in July from a year earlier. Still, that was less than the 5.6 per cent year-over-year in March, which was the largest annual increase in 15 years of records outside of the spring of 2020, when the pandemic struck.
Some skeptics warn that the Fed may be focusing excessively on the strength of the job market when other indicators indicate that the economy is noticeably weakening. Consumer spending, for example, and manufacturing have slowed. The central bank might raise rates too far as a result, to the point where it causes a deeper recession than might be needed to conquer inflation.
The economic picture is highly uncertain, with the healthy pace of hiring and low unemployment at odds with the government’s estimate that the economy shrank in the first six months of this year, which is one informal definition of a recession.
Yet a related measure of the economy’s growth, which focuses on incomes, shows that it is still expanding, if at a weak pace.
So far, the Fed’s rate hikes have severely dented the housing market. With the average rate on a 30-year mortgage reaching 5.66 per cent last week — double the level of a year ago — sales of existing homes have fallen for six straight months.
Consumers have moderated their spending in the face of much higher prices, though they spent more in July even after adjusting for inflation. But companies’ investment in new equipment has slowed, indicating they have an increasingly cautious outlook on the economy.