Federal Reserve chair Jerome Powell. Picture: NICHOLAS KAMM/AFP
Federal Reserve chair Jerome Powell. Picture: NICHOLAS KAMM/AFP

Washington — US job growth slowed in July and wages picked up moderately, which together with an escalation in trade tensions between the US and China could give the Federal Reserve ammunition to cut interest rates again in September.

The labour department’s closely watched monthly employment report on Friday came a day after President Donald Trump announced an additional 10% tariff on $300bn worth of Chinese imports starting on September 1, a move that led financial markets to almost fully price in a rate cut in September.

The US central bank last Wednesday cut its short-term interest rate for the first time since 2008. Fed chair Jerome Powell described the widely anticipated 25-basis-point monetary policy easing as insurance against downside risks to the 10-year economic expansion, the longest in history, from trade tension and slowing global growth.

Non-farm payrolls increased by 164,000 jobs in July, the government said. The economy created 41,000 fewer jobs in May and June than previously reported. July’s job gains were in line with economists’ expectations. The average workweek fell to its lowest level in nearly two years.

Before the release of the employment report, fed funds futures implied traders saw a 96% chance of the Fed cutting rates again next month, according to CME Group’s FedWatch tool.

The US-China trade war is taking a toll on manufacturing, with production declining for two straight quarters. Business investment has also been hit, contracting in the second quarter for the first time in more than three years and contributing to holding back the economy to a 2.1% annualised growth rate. The economy grew 3.1% in the first quarter.

July payrolls marked a further deceleration in job growth from an average of 223,000 per month in 2018. Economists say it is unclear whether the loss of momentum in hiring was due to ebbing demand for labour or a shortage of qualified workers.

Still, the pace of job growth remains well above the roughly 100,000 needed per month to keep up with growth in the working-age population. The unemployment rate was unchanged at 3.7% in July.

Despite the lowest jobless rate in nearly 50 years, wage growth remains moderate, contributing to a tame inflation environment, which could be supportive of another rate cut next month. Inflation has undershot the Fed’s 2% target this year, rising 1.6% on a year-on-year basis in June after gaining 1.5% in May.

In July average hourly earnings rose 8c, or 0.3%, after the same increase in June. That lifted the annual increase in wages to 3.2% in July from 3.1% in June. The trend in wage gains has slowed from late 2018, when wages were rising at their fastest rate in a decade.

Even with the step-down in job and wage gains, the labour market is supporting the economy as the stimulus from last year’s $1.5-trillion tax cut package fades. Economic growth in the third quarter is seen at about 1.5%.

Construction payrolls increased by 4,000 jobs after shooting up by 18,000 jobs in June. Manufacturing employment rose by 16,000 jobs after increasing by 12,000 in June. The strong manufacturing job gains are at odds with weakening activity in the sector. A survey late last week showed manufacturing employment hit its lowest level since November 2016 in July.

The sector, which accounts for more than 12% of the US economy, is being hobbled by trade tension, weakening global growth, an inventory bulge — concentrated in the automotive industry — and design problems at aerospace giant Boeing. Factory workers put in fewer hours last month.

The manufacturing work week dropped 0.3 hour to 40.4 hours, the lowest since November 2011. That contributed to the overall average work week falling to 34.3 hours, the fewest since September 2017, from 34.4 hours in June.

Government employment increased by 16,000 jobs in July, adding to June’s gain of 14,000.

Reuters