AMERICA’s labour market has become a reliable source of comfort when other economic indicators dismay. When growth slowed to just 0.8% in the first quarter of the year, economists were mostly unperturbed, because payrolls were growing by over 150,000 workers a month. Wage growth was picking up. Even labour-force participation was rising, after a long period of decline.

So the news on June 3rd that the economy created a mere 38,000 new jobs in May—the lowest total since 2010—was a nasty shock. Three days later Janet Yellen, the Fed’s chairman, hinted that she no longer favours raising interest rates this summer. This abrupt change of direction followed weeks of warnings from Fed officials that a rate rise was coming, perhaps as soon as the conclusion of the Fed’s next meeting on June 15th. That now looks all but impossible.

The consensus forecast was for about 160,000 new jobs in May. Even accounting for 35,000 striking workers at Verizon, a telecoms firm, the shortfall was substantial (though the estimate, which has a wide margin of error, may yet be revised up). A labour-market slowdown that had seemed gentle now looks pronounced: between March and May, the economy created on average 116,000 jobs per month, compared with 222,000 in the year to February. The fizzing labour market had been tempting Americans who had given up on work back into the labour force. But participation has now handed back two-thirds of its gains since September.

The report, taken alone, was dire. But on the whole, there is much less cause for gloom. The American economy may have slowed, but remains fundamentally strong, as it is buttressed by a healthy consumer. Personal consumption, adjusted for inflation, is up by 3% in the past year, having surged in April. The University of Michigan’s consumer-confidence index, which was due to be updated as The Economist went to press, grew strongly in May. Even before that, confidence exceeded its average during the 2003-07 boom. According to a recent Fed survey, 69% of Americans say they are “doing okay” or “living comfortably”, up from 62% in 2013. What is more, the rise has been most pronounced among those with only a high-school education.

Rising wage growth helps explain consumers’ cheer. Since early 2015 growth in average hourly earnings has perked up from about 2% to around 2.5%. Admittedly, this is sluggish compared with wage growth before the financial crisis, which often exceeded 3%. And wage growth has plateaued as the labour market has slowed (see chart 1).

But demographic change is keeping average wage growth artificially low. The financial crisis struck when the oldest baby-boomers were nearing retirement age. As well-paid boomers retire, average wages fall. In addition, many low-wage workers, who were disproportionately likely to lose their jobs during the recession, are now returning to work, which also pulls average wages down. Recent work by researchers at the San Francisco Fed suggests that, as of the end of 2015, these biases in entries and exits from the workforce were reducing growth in median weekly earnings by about two percentage points. Those in steady employment are faring well: the Atlanta Fed’s wage index, which tracks the same individuals over time, thereby ignoring retirements and new workers, shows wage growth of 3.4% over the past year. At the same time, Americans have been leaving petrol stations with fatter wallets, thanks to cheaper oil. Consumers did save more of the petrol-price windfall than expected. But that means that now oil prices are firming—on June 7th Brent crude surpassed $50 a barrel for the first time since October—consumers will not have to rein in spending much in response, argues Andrew Hunter of Capital Economics, a consultancy. Indeed, savings tumbled in April as consumption rose. Somewhat higher oil prices should also help put an end to another drag on the economy: pallid investment, which was partly responsible for the first quarter’s slow growth. Investment in oil rigs and the like has fallen by almost 70% over the past two years, adjusted for inflation, as investors have mothballed shale-oil and -gas projects. But in the week to June 3rd, the rig count rose for the first time since August. Even if oil prices were to fall again, energy investment cannot drag down growth for much longer, as it has already fallen so far.

Other business investment has disappointed, too. But rising house-building has picked up some of the slack (see chart 2). Adjusted for inflation, residential investment is up by 11% on a year ago. Government spending is also rising, after four years of pulling down growth as politicians trimmed budgets. An investment spree by state and local governments has contributed to the turnaround.

A dangerous world

Threats remain. The world economy is a worry. Europe has not yet secured its recovery (see next story), Brexit is a growing concern, and the Chinese economy remains fragile. Financial markets, which tanked early in the year on account of the world economic outlook, are sturdy for now—after Ms Yellen’s dovish comments, the S&P 500 rose close to a record high. But the world economy could yet shake markets again.

Even if it doesn’t, the contrast between American vigour and torpor abroad will delay interest-rate rises, argues Mark McClellan of the Bank Credit Analyst, a newsletter, because the Fed cannot tighten monetary policy without sending the dollar on a tear. That could itself cause renewed financial-market wobbles, particularly in emerging markets with dollar-denominated debts (see article). It would also dampen inflation, which remains below the Fed’s 2% target, as the dollar’s strength made imports cheaper.

Where next, then, for Ms Yellen? She rightly says that raising interest rates is not a goal in itself, and describes today’s near-zero rates as only “modestly” accommodative—a reminder that the so-called “natural” rate of interest, the rate which neither stimulates nor dampens the economy, is probably much lower than it used to be. The Fed will probably need convincing that the latest labour-market report was an aberration before tightening policy. The next few months should provide such reassurance. Come what may, expect Ms Yellen to take only baby-steps.