The US labor market cooled significantly last month as unemployment unexpectedly rose, sparking fears of a slowdown across the world’s largest economy.
American employers added 114,000 jobs in July – short of the 180,000 additions expected by economists, and a marked decrease from the 179,000 added in June.
The headline unemployment increased to 4.3%, its highest level since October 2021, up from 4.1% the previous month.
Wall Street fell sharply following the official release. The S&P 500 declined 1.8% to a two-month low, as the technology-focused Nasdaq fell 2.4% and entered “correction” territory, having retreated 10% from the record high it scaled last month.
On the campaign trail, the strength of the US economy has become a key issue. With many still feeling the pinch from years of high inflation, a majority of Americans wrongly believe the US is in recession, according to a Harris poll for the Guardian earlier this year.
Donald Trump, seeking to regain the White House, has tried to tap into the malaise by claiming that Joe Biden has damaged the US economy. But President Biden, who this month withdrew from the election and endorsed Vice-President Kamala Harris, has insisted the US emerged from the Covid pandemic with the “strongest economy in the world” on his watch.
As presidential candidates trade barbs over the economy, policymakers at the Federal Reserve are watching closely. The US central bank, which held interest rates this week, has signaled it could start to cut them later this year.
The Fed scrambled to cool the world’s largest economy two years ago, raising rates to a two-decade high as inflation surged to its highest level in a generation.
Officials are now monitoring how fast price growth fades, and the broader strength of the US economy, as they look to reduce rates. “We’re getting closer to the point,” the Fed chair, Jerome Powell, said on Wednesday, “but we’re not quite at that point yet.”
Policymakers hope to guide the US to a so-called “soft landing”, whereby inflation is normalized, and recession is avoided.
But Friday’s data prompted critics to warn the Fed had made a “serious mistake” by failing to cut rates this week. It is next due to make a decision on whether to reduce, hold or raise them in September.
Powell has “been warned over and over again that waiting too long risks driving the economy into a ditch”, said Elizabeth Warren, a Democratic senator. “The jobs data is flashing red. Powell needs to cancel his summer vacation and cut rates now – not wait six weeks.”
Economists also questioned whether the Fed had now waited too long to act. “July’s poor employment report leaves the Fed looking woefully behind the curve with its decision to hold rates this week,” said Ian Shepherdson, chairman of Pantheon Macroeconomics.
Biden acknowledged the US workforce was now “growing more gradually” in a statement which also pointed to inflation’s decline. “There’s more to do,” the president said, “but we’re making progress growing the economy from the middle out and the bottom up.”