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US jobs growth was weaker than forecast in July and was revised lower for the previous two months, with the labour market cooling after almost 18 months of interest rate rises.
The economy added 187,000 new non-farm jobs, according to data released by the Bureau of Labor Statistics on Friday, compared with forecasts of 200,000.
That followed a downwardly revised 185,000 in June — and could be taken as an encouraging sign that the Federal Reserve is making progress in its fight against inflation.
The Fed and investors have been closely monitoring the health of the labour market, as wages and jobs growth are critical contributors to inflation.
However, the labour market more broadly was still in robust shape, with the unemployment rate dipping to 3.5 per cent.
Hourly earnings growth was stronger than expected at 4.4 per cent year on year, well above the levels considered consistent with the Fed’s 2 per cent inflation target. Wages grew 0.4 per cent month on month, compared with consensus forecasts of 0.3 per cent.
Optimism has grown in recent weeks that the central bank is on track to bring inflation under control without driving the economy into a severe recession. Consumer price inflation fell further than expected in June, while the central bank’s preferred indicator — the core measure of the personal consumption expenditure index — also retreated to its lowest level since October 2021.
However, the Fed has warned that persistent strength in the labour market may make it harder to bring inflation all the way down to its target.
“I think markets have been overly optimistic with the last sets of inflation numbers,” said Agron Nicaj, US economist at MUFG. “As long as consumer spending remains high and the labour market remains strong, I would expect inflation to remain elevated.”
Job gains in recent months have been spread across sectors, but Nicaj said he would be paying particular attention to any signs of weakness in manufacturing. Manufacturing employment slipped by 2,000.
A survey by the Institute for Supply Management earlier this week suggested activity in the politically important sector was contracting, and Nicaj said “a lot of signs suggest that it will be one of the first industries to have consistently negative employment growth”.
The Fed last week lifted interest rates to their highest level in 22 years and insisted it may announce further hikes if required, but futures markets suggest most investors think the central bank will hold rates steady for the rest of the year.
Markets on Thursday evening were pricing in just a 17 per cent chance that the Fed lifts rates at its next meeting in September, and about a 38 per cent chance that rates rise at least once by November.