U.S. employers continued to hire at a healthy clip last month, but subdued wage growth suggests the economy is not poised to shift into higher gear.
The U.S. Labor Department said Friday that the economy added 209,000 jobs in July, just shy of analyst forecasts of 225,000 and the sixth straight month that nonfarm payroll gains topped 200,000. The agency also revised upward total job-creation for May and June by 15,000.
The nation's unemployment rate edged up to 6.2 percent, from 6.1 percent, a sign that more people looked for work in July.
"The 209,000 rise in July payroll jobs is another solid report, along with other positive labor market indicators," said Gus Faucher, senior economist with PNC Financial Services Group, in a research note, highlighting the uptick in the nation's labor participation rate.
Although job gains have been steady this year, broader economic growth has been uneven. The nation's gross domestic product -- the value of all goods and services produced in the U.S. -- plunged in the first three months of the year amid a harsh bout of winter weather and as businesses added to their stockpiles (which tends to reduce growth in subsequent months).
But the economy surged in the second quarter, with GDP rising to an annualized 4 percent as consumers spent money on big-ticket items and businesses boosted investment. Forecasters now expect the economy to grow at at annualized rate of at least 3 percent through the end of the year. That would likely keep unemployment ticking down. The economy has now added an average of 244,000 jobs per month over the past six months, the fastest pace of job growth since 2006.
"The rebound in growth, especially private domestic demand, will probably drive the jobless rate below 6 percent by year-end," Citi Research analysts predicted in a report ahead of the latest labor data.
With unemployment decreasing, hiring picking up and a declining number of company layoffs, experts and policymakers are now focusing on another key measure of the economy's health -- how much workers earn. Growth in hourly wages has been weak throughout the recovery, straining household budgets and dampening consumer spending.
The soft wage growth continued in July, with average hourly earnings for all private nonfarm employees rising 1 cent to $24.45. Wages are now growing at an annualized rate of only 2 percent, barely keeping earners ahead of inflation this year.
"Despite the strength of employment gains and the decline in the unemployment rate, there is still no sign of an acceleration in average hourly earnings, which were unchanged in July," said Paul Ashworth, chief U.S. economist with Capital Economics, in a client note.
Household income, which along with wages and salaries includes things like interest, dividends, and Social Security and pension payments, has also stagnated, declining from a peak of $56,000 in 1999 to roughly $54,000 as of June.
Of late, however, some signs suggest earnings are set to rise. The Labor Department's Employment Cost Index -- a broad measure of labor costs that includes wages, salaries and other compensation data for private and public employees -- rose 0.7 percent between April and June. That was more than double the pace of growth in the first quarter and the fastest rate of gain since early 2008, before the subprime meltdown stopped the economy in its tracks. Private-sector workers saw an even stronger increase.
For now, a spike in wages doesn't seem imminent. Year-over-year employment costs remain flat at 2 percent, well below the normal rate of growth seen before the Great Recession. But in principle more vigorous job growth should soon start to lift worker pay. Jim O'Sullivan, chief U.S. economist with High Frequency Economics, thinks it is too early to predict a sharp pick-up in wages, but he does expect them to accelerate in the months to come as unemployment drops.
In the short-term, weak wage growth takes pressure off the Federal Reserve to start raising interest rates, a crucial test of whether the economy is able to grow on its own without help from the central bank.
Since 2009, the Fed has sought to bolster economic growth by purchasing trillions of dollars in Treasury and mortgage bonds in order to keep interest rates low. That program is set to end in October, raising the question of how the economy will respond when interest rates gradually start to rise after six years of the Fed's "easy-money" policies.
For now, most forecasters don't expect such tightening to begin until the middle or second half of 2015, although some predict the Fed will move as soon as the first quarter. The central bank's policy-setting committee said this week it plans to keep short-term interest rates near zero "for a considerable time" after the Fed ends its bond purchase program.