August 5, 2016 Reading Time: 3 minutes

The U.S. economy posted strong job gains in July, adding 255,000 jobs, according to the report released this morning by the Bureau of Labor Statistics. It follows similarly strong job gains in June, when the economy added 292,000 jobs. Two months of solid jobs growth all but confirms that the slowdown in hiring in the spring, when the economy added an average of only 118,000 jobs from March to May, was a temporary setback. (See chart.)

Chart 1

There are other signs of improvement in labor market conditions. The unemployment rate is low at 4.9 percent, a level most economists would consider close to full employment. The labor force and labor force participation are rising for the second month in a row. Over 400,000 people joined the labor force in both June and July, bringing the labor force participation rate to 62.8 percent in July from 62.6 in May. 

People returning to the labor force is a good sign, because it usually means they see improved prospects of finding a job. And most of the people who joined the labor force in July found jobs – employment rose by 420,000 and the number of unemployed people shrank by 13,000. People entering the labor force and finding jobs is evidence of improved labor market conditions.

Of the 255,000 jobs added to the economy in July, most were in the private service-providing industries (201,000 jobs). Within service sectors, the largest increase happened in health care and social assistance (+48,800 jobs), followed by leisure and hospitality (+45,000 jobs) and professional and technical services (+37,400 jobs).

Goods-producing industries added only 16,000 jobs, most of them (14,000) in construction. Government added 38,000 jobs, the largest increase in government jobs in three years.

Hours and earnings also seem to be rising. Average weekly work hours in the private sector rose to 34.5 in July up from 34.4 in June, the first increase since the start of 2016. The average hourly earnings of all employees in the private sector have been rising since the start of 2016 and in July stood 2.6 percent higher than a year ago. Average hourly earnings of production and nonsupervisory employees also rose 2.6 percent compared to a year ago. (See chart.)

Chart 2

Most recent data indicates that the labor market is improving. This bodes well for consumers and consumer spending, which has been the driving force behind the overall growth of output. This may also give the Federal Reserve a reason to argue that an increase in interest rates is warranted because the economy is getting stronger. However, several other factors affect the decision about interest rates, including economic growth, inflation, and the state of the credit markets. With inflation at extremely low levels and economic growth subdued, it is not clear that the labor market improvements alone are sufficient to warrant an interest rate increase in the near future.

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Polina Vlasenko, PhD

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