Better-than-expected payroll growth pushes jobless rate down to 5.4%
Nonfarm payrolls rose by a robust 943,000 in July, easily surpassing already lofty expectations for 870,000 new jobs created during the month. Solid upside revisions to the tally for May and June added another 119,000 jobs, lifting the total increase to 1.062 million. On the back of those unexpectedly strong payroll numbers, the unemployment rate fell by 0.5% to 5.4% — the largest single-month decline this year.
Despite the gain, the labor market remains nearly 6 million jobs short of its pre-pandemic peak, which illustrates the progress that has been made but the significant runway that still exists for job creation to continue.
Over the last several months, economic activity has picked up sharply as businesses have reopened their doors and Americans have gradually returned to dining out and traveling again. The recently released GDP report confirmed that aggregate output surpassed its pre-recession level in the second quarter — much sooner than most had expected even after the recovery was underway last year.
Fueled by brisk consumer demand, the strength of the economic rebound was a positive surprise but one that brought different challenges. The sharp pickup in consumer demand has left many businesses short-handed, leading to record job openings in recent months and an extremely competitive labor market. Given the abundance of available jobs and the elevated unemployment rate, the recent surge in job creation was to be expected.
The competition for labor is also evident in growing upward pressure on wages, which rose by 0.4% for the month and 4.0% over the past year – an outsized increase compared to the more tepid gains of the past decade.
Still, given the strength of the economy and abundant job openings, the fact that unemployment is still as high as it is may be surprising. There are some hurdles yet to be overcome to return more sidelined Americans to payrolls, with a few likely to be at least partially resolved in the coming months.
Enhanced jobless benefits undoubtedly act as a disincentive for some to return to jobs that pay a wage less than or comparable to their unemployment payout. Those enhancements are set to expire in early September, eliminating one significant headwind to greater job creation. Additionally, with most students set to return to school within that same time frame, childcare challenges for many families should also be alleviated, allowing more working parents to actively seek out employment.
The other remaining headwind won’t be as easily resolved and could be exacerbated in the near term. Lingering concerns related to the health risk presented by COVID-19 is certainly a factor for many Americans, and one that increasingly appears to be rising anew with the spread of the more contagious Delta variant.
The bottom line? The labor market continues to dig out of the hole created by the COVID-19 pandemic. The recent acceleration in job creation is welcome, and there’s certainly reason to believe that it could continue over the next several months.
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