July hiring came in much weaker than expected
The US economy lost 23,000 jobs in July, a sharp miss against expectations for an 80,000-job gain.
The weakness was not limited to one month. May and June payrolls were revised down by a combined 103,000 jobs, giving the report a softer look than the headline alone.
The unemployment rate ticked down to 4.1% from 4.2%, but the decline came as labour force participation fell. Since January, the participation rate has dropped 0.7%.
The report gives Federal Reserve officials more reason to hold rates steady in September, especially if other labour-market data begins to show similar weakness.
Job losses hit education, retail and finance
The weakest areas were spread across several parts of the economy.
Local government education lost 50,000 jobs. Retail shed nearly 20,000 jobs, while the financial sector lost 14,000 jobs.
Healthcare remained one of the few bright spots, adding 22,000 jobs in July.
Capital Economics senior economist Thomas Ryan said the payroll weakness is likely to revive Fed concerns about the labour market and make officials less willing to commit to near-term tightening.
He added that it would likely take a meaningful upside surprise in next week’s inflation data for the Fed to hike as soon as September.
The Fed still sees a weak balance, not a collapse
Richmond Fed President Tom Barkin said Friday’s jobs report fits with how he has been viewing the labour market: not loose, not tight, but in a “weak balance.”
Barkin said employers are still not hiring aggressively, but they are also not firing heavily. He pointed to slower workforce growth tied to lower immigration, demographic shifts and workers aging out of the labour force.
“We’re in a zero-ish workforce growth environment, and we’re in a zero to modest to positive jobs growth environment,” Barkin said.
That view has been building inside the Fed for months. Earlier this year, several officials argued that weaker job growth could still be consistent with a balanced labour market if the available workforce is growing more slowly.
Inflation remains the deciding variable
The jobs report helps the case for holding rates, but it does not remove the possibility of another hike.
Fed Governor Lisa Cook, who supported holding rates steady at the July meeting, said earlier this week that she would back a rate increase if inflation fails to come down. She also said any decision would need to weigh the effect of higher rates on job-market stability.
That is now the Fed’s central problem. The labour market is showing signs of softness, but inflation remains above target.
Morgan Stanley Wealth Management chief economic strategist Ellen Zentner said the weak payrolls report may reduce pressure for a September hike, but next week’s inflation data will likely decide the debate.
If inflation comes in hotter than expected, the softer labour market may not be enough to stop calls for tighter policy.
September is still open
The July report shifts the Fed conversation, but it does not settle it.
A payroll contraction, large downward revisions and weaker participation all strengthen the argument for caution. At the same time, the Fed has been clear that inflation remains the priority unless job-market weakness becomes more persistent.
The next inflation report now carries even more weight. A cooler number would make a September hold easier to defend. A hotter number could put rate hikes back on the table, even after a weak jobs print.
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