US economy loses jobs in July, easing pressure on Fed to raise rates

The U.S. economy shed 23,000 jobs in July, according to the Bureau of Labor Statistics, badly missing forecasts that had called for a gain of around 80,000 to 90,000. The report also showed May and June job growth was revised down by a combined 103,000, and the unemployment rate slipped to 4.1% from 4.2% — a decline economists attributed to workers leaving the labor force rather than more people finding jobs. The weak data has sharply reduced expectations that the Federal Reserve will raise interest rates at its September meeting.

What did the July jobs report actually show?

Payrolls fell by 23,000, the second month of outright losses this year, versus consensus estimates of roughly 80,000 to 90,000 new jobs. Over the past year, the economy has averaged just 34,000 jobs added per month, a pace well below what economists consider healthy. The unemployment rate ticked down to 4.1%, but that came alongside a labor force contraction of about 264,000 people, driven especially by workers 55 and older dropping out. Average hourly earnings rose 3.2% year-over-year, below the 3.5% economists had expected, with average pay for private nonfarm employees at $37.62 an hour. Job losses were concentrated in local government education roles and in retail, including wholesale stores, hypermarkets, gas stations and general merchandise shops.

Was the drop a real warning sign or a technical quirk?

Several economists said much of the headline weakness traced to a 53,000 drop in government employment, almost entirely in local government education payrolls — a seasonal-adjustment pattern they expect to reverse by fall. Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, called it “a wonky seasonal adjustment fluke” and noted that stripping it out, private payrolls actually rose by 30,000 in July — “slow, but not a crisis.” Jeff Schulze of ClearBridge Investments made a similar point, saying the education-sector drag is typical for this time of year and that underlying job creation “remained modestly positive.” Jeffrey Roach of LPL Financial called the report “complicated,” saying weekly employment data show “minimal stress” and describing the trend as “an orderly slowdown” rather than a crisis. Not all economists were reassured: Chris Zaccarelli of Northlight Asset Management pushed back against the more optimistic reading, and Cory Stahle of the Indeed Hiring Lab, in a note titled “Unexpected Turbulence,” used an extended airplane analogy to describe an economy that has “descended from the near-stratospheric heights of 2021 and 2022” and is “starting to shake as the labor market looks to be entering a rough patch.”

How is this affecting expectations for the Federal Reserve?

The report has sharply cut the odds that the Fed hikes rates in September. On the prediction market Kalshi, odds the Fed holds rates steady jumped to 65% after the report, up from roughly 50-50 beforehand and down from nearly 58% odds of a hike right after the Fed’s late-July meeting. On CME’s FedWatch tool, odds of the Fed holding rates steady rose to 60%, from 45% on Thursday and about one-in-three a week earlier. Three members of the Federal Open Market Committee had dissented at the July meeting, arguing for a hike rather than holding steady, partly citing higher energy prices tied to the U.S.-Iran war. Rates currently sit between 3.5% and 3.75%. Morgan Stanley Wealth Management’s Ellen Zentner said the weak jobs data “may ease the pressure” for a September hike, but that next week’s Consumer Price Index release, due August 12, will likely be the deciding factor — if inflation comes in hot, calls for a hike could resurface even with a cooling labor market. Fed Governor Lisa Cook had said this week that a “low-hire, low-fire equilibrium” is keeping unemployment low despite weak hiring, but that she’d support a rate hike if inflation doesn’t improve. CME’s FedWatch still shows a 55% chance of a hike in October and nearly 75% in December, meaning a rate increase later this year remains plausible.

Why does the shrinking labor force matter?

The drop in unemployment to 4.1% looks like good news on its face, but nearly every economist quoted flagged it as the opposite: fewer people are working or looking for work, not more people finding jobs. Premier Miton’s Neil Birrell noted labor force participation has fallen to levels not seen since the Covid era, saying “jobs just aren’t being created.” This puts the Fed in a bind, balancing a mandate to support employment against inflation that remains elevated — running at an annual rate of 3.5%, per BBC. Markets reacted to the report by pushing stocks higher and Treasury yields lower on Friday, as investors bet the weak labor data would keep the Fed from tightening policy next month.

Sources

• Fortune
• BBC Business
• CNBC — Odds the Fed will hike in September tumble following big July jobs miss · The July jobs numbers are due out Friday. Here’s what to expect

Featured photo: St. Louis Federal Reserve Bank via Wikimedia Commons (Public domain)