Inflation fears eclipse recession fears as US job growth remains strong

Employers hired at a brisk pace in June, the Labor Department said Friday, and wages rose. The data leave the Federal Reserve little choice but to continue aggressively boosting interest rates in an effort to rein in inflation.

The jobs report for June leaves the Federal Reserve little choice but to continue aggressively raising interest rates in an effort to rein in inflation.SCOTT MCINTYRE/NYT

The good news: The US job market expanded at a healthy clip in June.

The bad news: The US job market expanded at a healthy clip in June.

The latest employment snapshot from the Labor Department on Friday showed that employers added 372,000 jobs last month and the unemployment rate held steady at 3.6 percent, just a tick above its prepandemic level and near a 50-year low.

Job growth was stronger than economists had forecast. And hiring might have been even more robust except for a troubling twist: The pool of available workers actually shrank last month, exacerbating the labor shortage that has hindered employers for much of the past two years.

Moreover, the report made clear that a recession isn’t preordained, even if areas beyond the labor market are cooling off. Each of the 12 economic contractions since World War II has been accompanied by rising unemployment, but the jobless rate has not been above 4 percent since November.

“You can put away your recession alarm bells,” Nick Bunker, an economist at the job website Indeed, wrote in a blog post.

But the labor market’s resilience in the face of slowing growth puts the Federal Reserve in uncharted territory as it tries to ease inflation, which is running at a 40-year high.

It has raised the benchmark federal funds rate three times since March, including an unusually large increase of three-quarters of a percentage point last month. That has pushed up mortgage rates and taken some air out of the housing market. Oil prices have retreated amid expectations that slower growth would reduce demand. Financial markets have been behaving like a recession is inevitable.

Still, the labor market has yet to show significant signs of weakening, leaving the Federal Reserve little choice but to continue aggressively raising interest rates. That raises the risk that the economy eventually tips into a recession.

Central bank officials meet next on July 25-26, and the consensus in financial markets is that they will vote to boost the federal funds rate by another three-quarters of a point. That would bring the rate to 2.5 percent, up from 0.25 before the Fed began its anti-inflation campaign.

Wall Street’s reaction to the report was mixed, underscoring just how hard it is to know exactly where the economy is headed.

After swinging between losses and gains, the Standard & Poor’s 500 index ended the day largely unchanged. The yield on the 10-year Treasury note rose above 3 percent as prices fell, an indication that bond investors expect the central bank to follow through with another big rate increase.

Here are some key takeaways from the June jobs data.

Wage growth is higher than the Fed would like.

Average hourly earnings were up 5.1 percent over the past 12 months, a slight drop from earlier in the year. With inflation running at over 8 percent, workers really are losing ground. The Fed would rather cut inflation so that smaller pay increases actually boost incomes.

In a good sign for inflation hawks, wage gains are not accelerating. Along with recent declines in prices for energy and other commodities, a few economists think the Fed now has some room to go easier on rate hikes.

The left-leaning Economic Policy Institute backs the Fed’s efforts to tame inflation, but the organization argues that further rate hikes would be a mistake.

“We want positive real wage growth for workers,” said Heidi Shierholz, the group’s president. “But — and this is hugely important — this decelerating wage growth means the Fed doesn’t need more interest rate increases to contain inflation.“

Brian Bethune, an economist at Boston College, expects policymakers to lift rates by one-half point later this month after seeing the reaction to their last move.

“The 75-basis-point surprise in June was a net negative, as it sent shock waves and panic through international financial markets,” he said.

The worker shortage persists.

The labor force shrank by 350,000 people last month, and the participation rate edged down to 62.2 percent of working-age adults, compared with 63.4 percent just before the pandemic. Economists say there are several reasons why the workforce is struggling to expand. These include COVID fears, which continue to keep some people at home; baby boomer retirements; and shifting priorities as Americans reassess their careers after a difficult pandemic period.

The June jobs gains were led by growth in professional and business services, leisure and hospitality, and health care. The total number of jobs in the economy is down by 524,000, or 0.3 percent, from its prepandemic level in February 2020, and the gap is wider when factoring in population growth.

However, private-sector employment is now 140,000 higher than in February 2020, while government employment is 664,000 lower. A big chunk of that deficit comes from state and local education jobs.

Hiring eased a bit from last month but remains well-above pre-COVID levels.

Employers have added an average of 381,000 jobs a month over the past four months, even as the labor force has remained stagnant. That’s down from a monthly rate of 539,000 jobs in the first quarter of the year but well above the 191,000 jobs a month that were added over the three years before COVID hit.

“The continued strength in the labor market provides an important tailwind for the economy against the risks of sustained hot inflation and deteriorating consumer sentiment,” said David Kelly, chief global strategist at J.P. Morgan Asset Management.

How long can that tailwind last?