July was supposed to mark the starting point for an amped-up economy. Instead, data on Friday showed the recovery remains stuck in second gear.
The Labor Department said that the economy added 162,000 jobs in July— enough to nudge the unemployment rate down to 7.4 percent, but short of analysts’ expectations. The government also lowered its estimates of hiring during the previous two months and reported that workers earned less and put in fewer hours.
This is not the way it was supposed to be. Economists have long been predicting that the recovery would take off in the second half of the year, once businesses and households digested new tax increases and government spending cuts were largely out of the way.
Recent indicators seemed to signal that the runway was clear. The number of people filing for unemployment benefits for the first time fell last week to the lowest point in five years, according to government data. The manufacturing industry expanded significantly in July for the second month in a row, according to the Institute for Supply Management. The nation’s gross domestic product also grew more rapidly than expected over the spring, clocking in at a 1.7 percent annual rate.
Still, that pace remains well below pre-recession levels, and some analysts had cautioned that it would not be enough to sustain robust job growth. To resolve that disconnection, GDP would have to pick up or the labor market would have to slow down, they said.
Keith Hall, a senior fellow at George Mason University’s Mercatus Center, said he is wagering on the latter. The former commissioner of the Bureau of Labor Statistics said the current GDP growth rate would typically translate into just 100,000 jobs a month.
“I certainly worry that there’s weakness in the economy generally,” Hall said. “You don’t normally see jobs getting out ahead of GDP in a recovery.”
Other economists continue to believe faster growth lies ahead despite the tepid start to the second half. But previous forecasts — including by the nation’s top economists at the Federal Reserve — have been overly optimistic.
In a speech Friday, St. Louis Fed President James B. Bullard said he believes the central bank should wait for more data before deciding when to start scaling back its massive economic stimulus program. He has previously stated that officials’ discussion of the issue was “premature.”
The Fed’s policy-setting committee “needs to see more data on macroeconomic performance for the second half of 2013 before making a judgment on this matter,” Bullard said in Boston.
The central bank is spending $85 billion a month to buy Treasury bonds and mortgage-backed securities in an effort to keep long-term interest rates low and boost demand from businesses and consumers. The Fed has said it will likely reduce its purchases later this year and end the program altogether when the unemployment rate hits 7 percent, which it expects to occur in mid-2014.
But the disappointing data could alter that timeline. The Fed has said it will adjust its plans according to health of the economy: If hiring and growth pick up, the central bank could pull back sooner. If they slow down, the Fed would keep the money flowing.
The July report suggests the economy is stuck somewhere in the middle.
“It doesn’t give them a clear decision,” said Alan MacEachin, an economist at Navy Federal Credit Union.
The government data on Friday showed the retail industry added the most jobs of any sector in July, hiring a net 47,000 workers. Restaurants and bars brought on 38,000 people, and the financial sector added 15,000 jobs.
But hiring was flat in the previously fast-growing health-care industry, according to the data. Hiring has averaged 16,000 jobs a month this year, compared with 27,000 jobs a month last year.
Construction was also stagnant, shedding about 6,000 positions last month. The industry is closely tied to the recovering real estate market, but hiring has been weak since the spring. The manufacturing sector added 6,000 jobs, reversing four months of declines.
“Overall, this is not a strong labor report,” MacEachin said. The data are “consistent with a sluggish, lackluster economy.”
One silver lining was the muted effect of the public sector. Federal and state governments cut about 5,000 positions, but that was offset by hiring at the local level. Still, furloughs related to the federal spending cuts may have contributed to the shorter work week and a dip in earnings.
U.S. stock markets closed slightly higher Friday after opening in the red on the disappointing jobs data. The blue-chip Dow Jones industrial average and the broader Standard & Poor’s 500-stock index gained about 0.2 percent, while the tech-heavy Nasdaq rose 0.4 percent.