Job Gains Surge in July

Job growth expanded in July, exceeding expectations.

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Diane Swonk

Diane Swonk

Chief Economist, KPMG US

+1 312-665-1000


Payroll employment surged by 528,000 in July after being revised up to 398,000 in June. Private sector payrolls jumped 471,000. Public sector payrolls rose by 57,000 in July, the largest monthly increase since May 2021. The bulk of the gains in public sector payrolls were in state and local education; school districts remain woefully understaffed.

Gains in the private sector were dominated by education and health care, leisure and hospitality and professional business services. Those sectors alone accounted for 307,000 of job gains, or nearly 60% of total job gains for the month. The increase in health care was concentrated in outpatient care, doctor, and dental offices. Dental fees were among those driving inflation in the health care sector in June.

The gains in leisure and hospitality continued to be driven by increases in food services and accommodation. This is despite an inflation-adjusted decline in spending at restaurants in May and June and reflects the ongoing staffing shortages many small businesses continue to struggle with.

Professional services were most heavily concentrated in hiring for those with strong technical services. This is the first drop in the hiring of accountants since February and is more reflective of a lack of supply than demand. Temporary hiring, which now includes some construction jobs, was up slightly. Permanent hires continued to dominate professional business services.

Manufacturing and construction posted a combined total of 62,000, also up from June. The gains were concentrated in heavy manufacturing and specialty contractors for both residential and nonresidential. Mining continued to add to employment, albeit marginally. Nearly all the increase in oil production we have seen since the start of the year has been among smaller, privately held producers. Large publicly traded companies are being forced to return more of their profits to investors.

Average hourly earnings rose 0.5% in July, an acceleration from June. That figure rose 5.2% from a year ago, the same as we saw in June. Average hourly earnings have slowed from their pace earlier this year, but we know from the employment cost index, which better captures wage gains, that wages remained strong in the second quarter. Those shifts, coupled with persistently low quit rates, are adding to the costs associated with a tight labor market; they are fueling inflation, given the low pace of productivity growth we have seen.

The household survey, which more accurately captures turning points, remained much weaker than the establishment survey. It showed only 179,000 new jobs after contracting in two of the previous three months. That suggests we could get a downward revision to the payroll data down the road, but it does not change the reality that the Federal Reserve is facing or the fact that labor supply remains constrained relative to demand.

In fact, the unemployment rate dipped to 3.5%, the same as the low hit in February 2020. Participation in the labor market fell to 62.1%, the second monthly decline in a row. That is unusual given how tight the labor market remains. The losses were concentrated among teens and those with a high school degree but no college. The participation rate for men of all races fell; the participation rate for Black and white women increased, while that for Hispanic women remained unchanged.

The ranks of those out sick and unable to work rose slightly to 1.5 million, the highest since February 2022 during the first Omicron wave. That is 60% above the pre-pandemic pace of 950,000 per month in the 2010s and is compounding staffing shortages. That said, higher inflation has forced more people to take second jobs to make ends meet. Multiple job holders increased by 92,000 to 7.6 million, its highest level since February 2020.

Employers also had to scramble to cover for a surge in the ranks of those out on vacation, which jumped from 4.8 million in June to 6.2 million in July. This was the highest level of people out on vacation since July 2019, but still well below that peak. Those vacations are much needed. Burnout across the labor market is high. Mental health has suffered. That said, it is another problem in staffing for firms to manage.

Bottom Line. The establishment data still increased much more rapidly than the household data but not enough to bring the demand for workers closer to supply. The unemployment rate dropped to the record low hit in February 2020. This ups the pressure on the Federal Reserve to raise rates aggressively again in September. Another 75 basis point hike is likely.

This ups the pressure on the Federal Reserve to raise rates aggressively again in September.