U.S. employment increased at a solid pace in July while wages rose at a faster-than-expected clip, consistent with sustained labor demand that’s at the root of renewed momentum in the economy.

Nonfarm payrolls increased 187,000 last month following a similar advance in June, a Bureau of Labor Statistics report showed Friday. The unemployment rate unexpectedly dropped to 3.5%, one of the lowest readings in decades.

A hiring sign is shown in Wheeling, Ill., on March 19. Nam Y. Huh/Associated Press

Still-healthy job and income gains point to an economy capable of weathering a period of rapid interest-rate increases aimed at thwarting high inflation. That’s also contributing to renewed confidence among consumers, which may bode well for spending and growth.

It’s consistent with the Federal Reserve’s goal of a “soft landing,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics. “Payroll growth is coming down nicely, not too hot and not too cold.”

Average hourly earnings were up 0.4% from June and 4.4% from a year earlier, both stronger than forecast. That said, pay growth has been showing signs of slowing, as the supply and demand for workers come more into balance following years of pandemic-induced labor shortages.

The advance in payrolls reflected an acceleration in employment at service providers, over half of which came from health care. Hiring was also strong within financial activities and construction.

Combined with inflation that’s running at the slowest pace in more than two years, the data support growing calls that the Fed can tame price pressures without inducing a recession. Policymakers resumed hiking interest rates last week and left the door open for more, and Friday’s figures will help shape their next decision in September.

Chair Jerome Powell and his colleagues have emphasized it’ll depend on incoming data, and there’s still a lot to come between now and then. Officials will see another jobs report plus the latest readings on inflation, and Powell, among others at the Fed, will speak at the central bank’s annual Jackson Hole symposium.

The report indicated the mismatch in labor is slowly being alleviated. The overall participation rate – the share of the population that is working or looking for work – held at 62.6% in July, still the highest since March 2020. However, for those ages 25-54, it declined for the first time since late last year, largely due to women leaving the labor force.

Treasury yields declined and the S&P 500 opened higher. Traders assigned a slightly lower probability that the Fed will hike interest rates again by year-end.

Forecasters have repeatedly warned that the Fed’s most aggressive interest-rate hikes in a generation will induce a downturn, but the economy is increasingly dodging those calls – even the central bank’s economists have scrapped their expectation for a recession.

But the economy isn’t totally out of the woods yet. The Fed may still hike interest rates again and is poised to keep them elevated for some time. Inflation is still running too hot, and the upcoming resumption of student loan payments will be a renewed burden for millions of borrowers.

And while President Biden’s policies have boosted economic growth, the debt taken on to finance his agenda has added to the nation’s already swelling pile. That led Fitch Ratings to downgrade the U.S.’s credit rating earlier this week, following through on a warning initiated at the height of the debt-ceiling drama in May.