The latest employment situation report published today by the U.S. Bureau of Statistics has beaten the expectations of analysts by a rather comfortable margin, casting doubt over recent calls that the world’s largest economy is already in the midst of a recession.

Nonfarm payrolls increased 528,000 for the month of July, with some analysts earlier estimating an increase of half as much growth and essentially a cooling off of the jobs market. Unemployment has also moved down to 3.5% from last month’s 3.6%.

“Both total nonfarm employment and the unemployment rate have returned to their February 2020 pre-pandemic levels.” The statement read.

The payrolls from the previous months of May and June were also revised higher, with an extra 28,000 jobs cumulatively added after additional reports were collected over the months following the original report of 372,000 created jobs.

Not long after the release, the three major indexes in the U.S - the Dow, the Nasdaq Composite, and the S&P 500 - all dropped into the red, while treasury yields increased, as this report shows that the Fed has room to continue raising interest rates before the country falls into recession.

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U.S. Indexes Daily Charts - Source: ActivTrader

The recovery since the pandemic is still going on

The news is a clear and positive sign that the country continues on its economic recovery following the pandemic, with the best results seen since the February release, but will likely also signal to the Federal Reserve to continue on its current aggressive trajectory of rate hikes in its bid to curb inflation.

The Labor Department report showed that growth appears to be widespread across industries, most notably in leisure and hospitality with an added 96,000 jobs, as the population returns to normal habits and tourism starts to make a comeback, after more than two years of steering clear of social hubs and eating out.

Health care added 70,000 jobs, and business and professional services increased by 89,000. Construction and manufacturing were also up, with 32,000 and 30,000 jobs added respectively.

“Total nonfarm employment has increased by 22 million since reaching a low in April 2020 and has returned to pre-pandemic level. Private sector employment is 629,000 higher than in February 2020.” The report read.

Government jobs are still lagging behind though, showing that some sectors of the economy are yet to recover from the pandemic, with 597,000 jobs less than two years ago.

Inflation likely to keep rising if a wage/spiral emerges

Wages were also stronger in July, with the average per hour earnings being bumped 0.5% and over 5% over the same time twelve months ago. With more of the population employed and wages continuing to increase, some analysts are concluding that this will only cause inflation to grow even further out of control.

As declared by the BIS, “inflation has returned, reaching levels not seen in decades. Whether inflation enters a persistently higher regime will depend on labor market developments, and on whether a wage-price spiral emerges.”

The Bank of International Settlement explains that if inflation numbers remain high, then households may require higher wages to make up for their diminished purchasing power. Consequently, companies might decide to increase prices to keep their margins.

How about the Fed’s future actions?

Some are already predicting that the Fed will be looking at a 75 basis point move again in September, after already having hiked rates by 225 basis points since March this year - but this will be dependent on the evolution of the next few CPI reports, other inflation figures, as well as the evolution of the employment situation.

One sign that the labor market is perhaps showing some signs of weakness though is the three months of increased jobless claims, which are now back above 250,000. Although this isn’t really reflected in the numbers, it could be a number to follow in the months to come.

Still, this NFP report shows a strong and resilient employment situation that might push the Federal Reserve to hike interest rates more aggressively in the upcoming months, after raising its benchmark rates by 0.75 percentage points for the second time in a row last month to a range of 2.25% to 2.5%.

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