Pretty much everybody woke up last Friday feeling like America's labor market was in fine shape (to the extent the average person was thinking about it at all). Maybe things weren't perfect, and workers weren't living in the "world is your oyster" situation they were in 2021 and 2022, but in general, things seemed pretty strong.
And then, at 8:30 a.m. ET, everything changed. The jobs report said the US economy added 114,000 jobs in July, far fewer than the 176,000 jobs that economists expected. The unemployment rate jumped to 4.3% from 4.1% the previous month. For some context, back in April it was at 3.9% and had been under 4% for the longest stretch in decades. The weakness of the jobs report tipped the worry scale and sent markets into meltdown mode. Many investors decided it was time to panic after all.
While a single data point isn't a good reason to change one's entire narrative, the report served as a wake-up call that danger is closer than a lot of people thought. The cracks in the economic foundation are increasingly impossible to ignore. While it's not in disaster territory, the labor market has been weakening for a while, and it's not clear what's going to reverse that trend. The report's release just a few days after the Federal Reserve decided to hold interest rates steady rather than cut them in an attempt to restabilize the economy also fueled fears that the central bank is behind the curve and that a recession may be on the horizon.
"There was a lot of data that was sort of in the greenish area, and now there's a lot more data that's flashing yellow lights," said Guy Berger, the director of economic research at the Burning Glass Institute, a labor-analytics firm.
This is a weaker labor market, and we haven't gotten a sign that it's done weakening.
Outside the July jobs report, there were plenty of signs the labor market was cooling off. The June Job Openings and Labor Turnover Survey, also released last week, showed a slowdown in hiring, with the number of people starting new jobs back to where it was before the pandemic in 2020. The rate at which people are quitting their jobs was back at pre-pandemic levels, too. The positive news was that layoffs remained low, but people getting a pink slip is usually a lagging indicator — businesses are more likely to slow down on hiring new people before they send their current workers packing. Overall, the report made it clear that the job market isn't as dynamic as it was just a couple of years ago.
"When hiring goes down, it doesn't always lead to a recession, but it's usually the first response, and we have seen hiring consistently come down," said Skanda Amarnath, the executive director of the advocacy group Employ America.
There are other signs of weakness, too: The Conference Board's Employment Trends Index fell for the second consecutive month in July, which is generally a sign of a potential slowdown. The share of respondents who say jobs are hard to get ticked up, though it's still well below where it was in recent recessionary periods. For those who want a raise, there's also some tough news: Wage growth is slowing. The Employment Cost Index showed that wages for private-sector workers grew at 3.4% in the second quarter, the slowest pace since September 2020.
The theme of the labor market in recent months has been one of softening. While the economy is still adding jobs consistently, it's doing so at a lower rate than it was during the pandemic recovery. Basically, if you like your job, or if you don't, you probably should keep it. This was to be expected — most economists say the pace at which we were adding jobs in 2021 and 2022 wasn't sustainable. The question since then has been what getting back to normal would look like and what's to keep normal from tipping into negative. Once the unemployment rate starts to tick up, what's to keep it from rising further instead of staying put?
One factor that has put investors, economists, and observers on edge is the Sahm rule, a recession indicator named after the former Fed economist Claudia Sahm. It says that if the three-month moving average of the unemployment rate rises by 0.50 percentage points or more over its low over the previous 12 months, we're at the start of a recession. If that seems confusing, here's the only thing you really need to know: The July jobs report triggered the Sahm rule.
Sahm, who is now the chief economist at New Century Advisors, told me that the country is not in a recession at this moment and that there are reasons to think her namesake rule is a bit out of whack. The growing number of people entering the labor force, whether they're immigrants entering the country or people coming into the job market from the sidelines, might throw her rule off. But that doesn't mean we're in the clear.
"I think the Sahm rule is overstating the current weakness, but there is momentum there under the hood," she said. "This is a weaker labor market, and we haven't gotten a sign that it's done weakening."
Amarnath echoed the point that there is some reason to think this time is different. The labor-force participation rate for prime-age workers (people who are 25 to 54) is near historic highs, and employment in recent years has been high and stable. It's worth remembering that the current unemployment rate is far from catastrophic. It's around, or even below, the level many economists would consider full employment — or at least they did before the past couple of years suggested it was lower.
"By historical standards, we are still very much at full employment," said Alí Bustamante, the director of the Worker Power and Economic Security program at the Roosevelt Institute, a progressive think tank. "I think one of the things of the labor market of the past two years is that it's largely shaped our understanding of what full employment actually looks like."
Bustamante added: "A couple of years ago, people would've seen a 4.3% unemployment rate, and they would not blink an eye just because they wouldn't have connoted that with any considerable amount of slack in the economy."
The Fed probably has some margin for error, but it doesn't have infinite margin for error.
Despite encouraging historical comparisons, the message of the July jobs report is that the labor market's momentum is heading in the wrong direction, and the risk that things could get worse is very real.
"There's some data that signals that we're probably in the midst of a slowing in job growth, a slowing in wage growth, a slowing in all these patterns," Amarnath said. "If this slowdown continues in the manner it is, it'll be a distinction without a difference. We'll be in a recession anyway if that's the case."
One way to reverse the job-market trends, experts believe, is for the Fed to cut interest rates. While slicing 0.25 percentage points off its main interest rate would be a minor adjustment in the overall cost for businesses, it would be a start in lowering borrowing costs for loans like mortgages and credit-card rates while also inspiring businesses and consumers to keep on spending. The Fed had the opportunity to lower interest rates in late July and didn't, and unless it undertakes an emergency rate cut — which is unlikely — any moves are likely to wait until its next meeting, in September. In his remarks after the July decision, Fed Chair Jay Powell seemed pretty chill about the jobs market, though he said that, as always, the central bank would act if need be. The "need be" sign is now flashing.
"Things are shakier," Berger said. "The Fed probably has some margin for error, but it doesn't have infinite margin for error."
There's more data to come between now and September, including the August jobs report. Nobody should be losing a ton of sleep over the state of the labor market or over the economy overall. But the landscape has revealed itself to be more precarious than a lot of people thought, and precarity is never a fun spot to be in.
Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.