The labor force participation edged marginally lower last month, falling to 62.1% from 62.2% in June. Meanwhile, average hourly earnings increased 0.5% for the month, higher than June’s upwardly revised monthly wage gains of 0.4%. On an annual basis, earnings were up 5.2%, on par with June’s year-over year increase.

“The July employment report was an absolute knock-out, a major upside surprise relative to my expectations and indeed much of the labor market data released up to this point,” Renaissance Macro Research Head of U.S. Economics Neil Dutta said in a note. “Talk of recession and a monetary policy pivot is premature.”

“That said, this jobs report is consistent with an inflationary boom,” Dutta added. “The Fed has a lot more work to do and in an odd way, that the Fed needs to get more aggressive in pushing up rates, makes the hard-landing scenario more likely.”

Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., July 27, 2022. REUTERS/Elizabeth Frantz

At the industry level, services-based employers continued to lead gains in July as companies rushed to hire back workers laid off during the pandemic, with a return to in-person activities driving consumer demand. Employment in the leisure and hospitality industry jumped by 96,000 jobs last month, compared to an increase of 67,000 jobs in June.

Despite gains in the sector, which was among those hardest hit by COVID-related lockdowns, employment in leisure and hospitality remains at 1.2 million, or 7.1% below pre-pandemic figures.

Job gains in the professional and business services sector were also a standout in July’s report with 89,000 jobs added last month. The increases bring employment in this area of the economy to 986,000 higher than in February 2020, with most jobs added across management of companies and enterprises, computer systems design and related services, office administrative services, and scientific research and development services.

Unusual tightness in the labor market has been a focus of Federal Reserve policymakers, with the imbalance between job openings and available workers placing upward pressure on wages and adding to inflationary pressures.

Markets reacted negatively to the report, which served as affirmation to investors the U.S. central bank is likely to stay on track with aggressive rate hikes.

“The market’s tepid reaction could be sign that any hopes of a more dovish Fed are likely out the window,” Mike Loewengart, managing director of investment Strategy at Morgan Stanley’s E*TRADE said in emailed commentary.

Economists at Bank of America said Friday the bank maintains expectations for smaller-sized increases going forward, projecting a hike of 50 basis points at the September and November meetings, followed by a 25 basis point bump in December.