Unemployment rate falls to 3.5 percent

Washington Far more jobs were created on the US labor market in July than expected. Last month, 528,000 new jobs were added, as the government announced in Washington on Friday, twice as many as economists had actually expected. The separately calculated unemployment rate fell to 3.5 percent in July from 3.6 percent in June. The number of jobs lost in the course of the pandemic has now been restored.

Actually, that’s good news. But they complicate the work of the US Federal Reserve (Fed), which is trying to cool down the overheated American economy with its interest rate hikes. “The job market is boiling over,” commented Michael Feroli, chief economist at America’s largest bank, JP Morgan Chase.

The development puzzles economists. In view of the high inflation and the rapidly rising interest rates, the economy had recently shown weaknesses. Economic growth slowed for the first two quarters of the year, which is a technical definition of a recession. The housing market had also given way.

However, the labor market was surprisingly strong as early as June. The number of initial applications for unemployment benefits was recently higher than it has been for more than six months.

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However, many of the applicants find a new job comparatively quickly. That has sparked debate about the strength of the world’s largest economy.

Jeanette Garretty of wealth manager Robertson Stephens said on CNBC, “We can’t be in a recession if the unemployment rate doesn’t go up.”

Meanwhile, a number of developments have been unfolding in the labor market since the pandemic, which could lead to lasting distortions. The employment rate fell slightly in July, to 62.1 percent. Average hourly wages, on the other hand, rose by 5.2 percent compared to the previous year.

Wealth effect has significantly reduced the number of employees

A good two years after the start of the pandemic, economists have to deal with new realities: The regional Federal Reserve in St. Louis, one of the 12 central banks that make up the US Federal Reserve (Fed) in Washington, estimates that three million workers have retired early because of the big rally in markets has significantly strengthened the fortunes of many Americans over the past two years. This wealth effect, fueled by low interest rates, has significantly reduced the number of workers.

US unemployment rate falls

The unemployment rate fell to 3.5 percent in July from 3.6 percent in June.

(Photo: dpa)

Younger workers up to the age of 24, on the other hand, would feel the negative consequences of the pandemic particularly badly, believes Vincent Deluard, an analyst at broker StoneX. “The number of people struggling with addiction, anxiety and obesity has increased, leaving many young people unable to work.”

Others, on the other hand, would rather work as part of the so-called gig economy on their own account for ride-hailing services like Uber and food delivery companies like Doordash, or try themselves as influencers on the internet. Deluard cautions. “Children no longer dream of becoming astronauts or firefighters. Being successful on Instagram and Youtube is the new holy grail for Gen Z.”

As a result, companies have had too few staff for months and, in case of doubt, “hoard” staff because the labor market is so tight, says Diane Swonk, chief economist at management consultancy KPMG – even though the economy is cooling off.

Further course of the US Federal Reserve

The strong labor market data also lead to new discussions about the further course of the Fed. It had raised the key interest rate twice in a row by 0.75 percentage points, it is now in a range of 2.25 to 2.5 percent.

Definition: What is a recession?

Federal Reserve Chairman Jerome Powell had argued that the US economy could still cope with significantly higher interest rates and that the Fed must therefore focus on fighting inflation. This is 9.1 percent. Fresh data on July price increases will be released next week.

KPMG chief economist Swonk believes this will increase pressure on the Fed to hike rates even more. At the most recent Fed meeting in July, Powell deliberately kept open the question of how large the upcoming rate hike could be. 0.5 and 0.75 percentage points are discussed. However, some market observers also consider an increase by a full percentage point, which is extremely rare, to be conceivable.

A number of central bankers had spoken out in favor of significantly higher interest rates in the past few days. Loretta Mester, head of the regional central bank in Cleveland, spoke out in favor of a key interest rate of over four percent on Thursday. This level should be reached in the first half of next year.

Other economists, such as former US Treasury Secretary Larry Summers, believe significantly higher interest rates will be needed to fight inflation. The next Fed meeting will not take place until the end of September. Until then, there will still be a series of data on inflation and the labor market that will feed into monetary policymakers’ decisions.

The prospect of even faster rate hikes got investors excited: the leading indices Dow Jones, Nasdaq and S&P 500 fell by up to 1.4 percent in early New York trading on Friday.

More: Failure of ECB and Fed – Four reasons why central banks reacted so late to inflation

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