Surprising July Jobs Report Muddies the Economic Picture

Investors looking to the July jobs report for clarity on the state of the economy may come up empty. But analysts say that cloudy picture likely takes a September interest rate raise from the Federal Reserve off the table.

To some degree, the July jobs report told conflicting stories, according to economists. The US economy unexpectedly lost 23,000 jobs last month, according to the latest report from the Bureau of Labor Statistics. That surprise loss followed downward revisions to originally reported gains in May and June. As a result, the hiring landscape now appears to have been softer than previously thought, economists say.

However, the unemployment rate fell to 4.1% in July from 4.2% in June. It had been forecast to remain steady. Despite the picture of a tightening job market, wage growth remains moderate, economists say. The net result is that, barring surprisingly hot inflation readings between now and the next Fed meeting in September, analysts say officials will likely keep interest rates where they are, even if at least one rate hike is in the cards before year-end.

“While incoming inflation data will be the ultimate arbiter, slowing jobs growth helps support a September hold,” wrote Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, in a commentary Friday morning.

July Jobs Report Key Stats

• Total nonfarm payrolls fell by 23,000 after rising by 20,000 in June.
• The unemployment rate fell to 4.1% in July from 4.2% in June.
• In July, average hourly wages rose by 2 cents, or 0.1%, to $37.62.

July Hiring Data Likely Distorted Downward

Heading into the July jobs report, many economists saw the hiring market as relatively stable. But the latest data showed a weaker landscape. Not only did July show an unexpected decline, but the June hiring increase was revised down to 20,000 from the originally reported 57,000. The May job gain—which had surprised economists with a large 172,000 figure—was significantly revised down for a second time, and it now stands at 63,000.

The BLS noted that the hiring total was depressed by a loss of 50,000 jobs in local government education. Before July, that category showed little net change over the prior 12 months. Economists said the decline was likely due to issues with seasonal adjustment factors, and they noted that private payroll figures were in positive territory.

“This is a typical seasonal development with the end of the school year that is usually reversed come fall, suggesting that underlying job creation remained modestly positive,” wrote Jeff Schulze, head of economic and market strategy at ClearBridge Investments, in commentary on the report.

A Tightening Labor Market, but More Data Concerns

More than the payrolls drop, “What was more surprising to us was the continued decline in the unemployment rate, despite slower job growth,” says Preston Caldwell, senior US economist at Morningstar. He notes that the three-month trailing average unemployment rate has dropped to 4.2% from 4.4% at the start of the year.

“According to the data, that’s due to a collapse in labor force participation, more than offsetting the weak job gains. Recall that only those without a job who are in the labor force are counted as unemployed,” Caldwell explains. “We’ve cautioned, however, about the growing data quality issues with the Current Population Survey, which generates the unemployment rate, labor force participation, and related data.”

Still, some economists say the data reflects a tightening job market. Economists noted that the declining labor force participation rate has been concentrated among workers aged 55 and older, and that decreased immigration has meant the US economy is unable to offset the lower numbers of workers in that age group.

“While the unemployment rate is falling, that is mostly for the wrong reason—not enough workers. Immigration compensated for the aging workforce in the first few years of the post-pandemic expansion, but that’s not happening anymore,” says Bill Adams, chief US economist at Fifth Third Commercial Bank.

Soft Wages Give Fed Room to Breathe

While the unemployment rate may suggest a tightening jobs market with fewer workers looking for work, economists say that is not translating into upward pressure on wages that could feed an inflationary spiral. In July, average hourly wages rose by 2 cents, or 0.1%, to $37.62.

“The fact that wage growth continues to trend down to 3.3% year over year suggests the labor market remains in a state of slack, with a slight excess of labor supply over demand overall,” says Morningstar’s Caldwell. Along with the software hiring picture, this should leave the Fed in a wait-and-see mode in September.

Before the jobs report, bond futures traders had put a 55% chance on the Fed raising the federal-funds rate target by a quarter point from its current target range of 3.50%-3.75%. Following the report, those odds fell to around 44%, according to the CME FedWatch Tool.

“Weaker job and wage growth gives the Fed some breathing room to remain patient on the inflation front—and on hold with rates—at the September FOMC meeting, in our view,” ClearBridge’s Schulze wrote.

Still, the report appears to leave future rate increases on the table. Odds of at least one rate hike before the end of 2026 are put at more than 75%. “Today’s jobs numbers, even if they persist in coming months, do not in any way rule out a rate hike,” Caldwell says. “The labor market is not deteriorating further, so stubbornly high inflation could still readily justify tightening monetary policy.”