U.S. job growth powered ahead and the unemployment rate fell in July amid demand for workers in the labor-intensive services sector, quashing fears of a hiring slowdown and suggesting the economy began the second half of the year with strong momentum.

The Labor Department's closely watched employment report on Friday also showed strong wage gains, as employers competed for scarce workers and a drop in the unemployment rate to a 16-month low. The report came on the heels of news last week that the economy fully recovered in the second quarter the sharp loss in output suffered during the very brief pandemic recession.


Nonfarm payrolls increased by 943,000 jobs last month after rising by 938,000 in June. Economists polled by Reuters had forecast payrolls would increase by 870,000 jobs. Estimates ranged from as low as 350,000 to as high as 1.6 million. Employment is now 5.7 million jobs below its peak in February 2020.

Job gains were partially flattened by shifts in seasonal employment at schools caused by the COVID-19 pandemic.

"Labor market conditions appear to be healthy at the start of the third quarter as labor-intensive service businesses continue to hire given strong pent-up demand," said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina.


Prior to the pandemic, education employment normally declined by about 1 million jobs in July as schools closed, but this year many students are in summer school catching up after disruptions caused by the pandemic. That likely threw off the model or seasonal factors that the government uses to strip out seasonal fluctuations from the data, boosting payrolls.

Government payrolls increased by a whopping 240,000 jobs last month, with employment in local government education rose by 221,000. The Labor Department's Bureau of Labor Statistics, which compiles the employment report, said "pandemic-related staffing fluctuations in education have distorted the normal seasonal buildup and layoff patterns, likely contributing to the job gains in July."

Employment in the leisure and hospitality sector increased by 380,000 jobs, with payrolls at restaurants and bars advancing by 253,000. Hiring was also strong in the professional and business services, transportation and warehousing, as well as healthcare industries. Manufacturing payrolls increased by 27,000 jobs, while construction employment rebounded by 11,000 jobs.

The unemployment rate fell to 5.4%, the lowest level since March 2020, from 5.9% in June. The decline came even as 261,000 people entered the labor force, lifting the participation rate to 61.7% from 61.6 in June. The jobless rate, however, continued to be understated by people misclassifying themselves as being "employed but absent from work." Without this misclassification, the unemployment rate would have been 5.7% in July.

U.S. stocks opened largely higher after the release of the report. The dollar was trading higher against a basket of currencies. U.S. Treasury prices fell.


WAGES RISING

Economic growth this year is expected to be around 7%, which would be the fastest since 1984. The labor market's health will weigh heavily on the Federal Reserve's next monetary policy steps.

"Strong readings over the next couple of months seem likely to give the green light for a pre-announcement of tapering at the Fed's September meeting," said James McCann, deputy chief economist at Aberdeen Standard Investments in Boston.

But surging COVID-19 infections, driven by the Delta variant of the coronavirus, pose a risk. While major disruptions to economic activity are not expected, with nearly half of the population fully vaccinated, spiraling cases could keep workers at home and hamper hiring.

A shortage of workers has left employers unable to fill a record 9.2 million job openings. With workers scarce, employers continued to raise wages. Average hourly earnings rose 0.4% last month, led by low-wage industries, after a similar gain in June. That raised the year-on-year increase in wages to 4.0% from 3.7% in June.

Lack of affordable child care and fears of contracting the coronavirus has been blamed for keeping workers, mostly women, at home. There have also been pandemic-related retirements as well as career changes.

Republicans and business groups have blamed enhanced unemployment benefits, including a $300 weekly payment from the federal government, for the labor crunch. Though more than 20 states led by Republican governors have ended these federal benefits before their Sept. 6 expiration, there has been little evidence that the terminations boosted hiring.

The worker shortage is expected to ease in the fall when schools reopen for in-person learning, but some economists are less optimistic, arguing that the economy was creating many low-skilled jobs and there were not enough people to take them.

"One of the biggest problems we have right now is roughly two-thirds of our job openings are in the kind of jobs that do not require any type of a college degree," said Ron Hetrick, a senior labor economist with Emsi Burning Glass in Moscow, Idaho. "We have about 6 million job openings that are not requiring a college degree, but we only have 3.4 million who are unemployed that don't have a college degree."


Treasury yields are powering higher Friday, and stock indexes are holding close to their record highs on Wall Street after a report showed the U.S. job market is making widespread improvements.

The S&P 500 was up 0.1% after the first hour of trading, a day after setting another all-time high. The Dow Jones Industrial Average was up 134 points, or 0.4%, at 35,196, as of 10:31 a.m. Eastern time, and the Nasdaq composite was 0.4% lower.

Some of the sharpest action was in the bond market, where Treasury yields tend to move with expectations for the economy and for inflation. The yield on the 10-year Treasury climbed to 1.29% from 1.21% late Thursday, clawing back all the losses it sustained over the last week.

Yields jumped as economists said Friday’s encouraging jobs report will give the Federal Reserve another nudge to pare back its bond-buying program, which is trying to juice the economy by keeping longer-term rates low. Economists say an announcement by the Fed about a possible slowdown in purchases could come as soon as the end of the month.

Friday’s jobs report showed that hiring was stronger than economists expected, with employers adding 943,000 workers to their payrolls. Average wages also jumped 4% in July from a year earlier, more than economists expected.

Most stocks across Wall Street rose following the report, with companies whose profits are most closely tied to the strength of the economy leading the way. Financial companies within the S&P 500 rose 1.5%, and materials companies rose 1.1%.

But the better-than-expected data on the economy took the momentum out of technology stocks, which have been some of Wall Street’s biggest winners since the pandemic.

They’ve been big beneficiaries of the ultra-low interest rates the Federal Reserve has brought about. When bonds are paying little in interest, investors are willing to pay higher prices for other kinds of investments, particularly stocks of companies with big earnings growth forecast far in the future.

A rise in interest rates could undercut those stocks, or at least add a headwind that has been largely absent for more than a year. A slowdown in bond purchases by the Fed would be the first step toward raising short-term interest rates off their record low of nearly zero.

That’s why the Nasdaq struggled more than indexes Friday. It’s also why the benchmark S&P 500 was making only listless moves, even though three out of five stocks within the index were rising.

Apple, Microsoft, Nvidia, and other technology stocks make up 28% of the S&P 500 by market value, more than double the weight of any of the other 10 sectors that comprise the index. That doesn’t even include some big tech-oriented companies like Amazon and Tesla.

Those five companies were the biggest weights on the S&P 500 in morning trading.

The biggest gain in the S&P 500 came from Corteva, an agricultural company spun off from DowDuPont. It jumped 7.9% after reporting stronger revenue and earnings for the latest quarter than Wall Street expected.

That’s been the norm for this earnings reporting season. Close to 90% of the companies in the S&P 500 have told investors how much profit they earned during the spring, and their earnings were roughly double what they were a year ago.