America’s employment situation weakened more than expected in July, with the latest nonfarm payrolls report showing far fewer jobs were created last month than experts anticipated. That, as well as a higher unemployment rate and slower wage growth, has Wall Street convinced that a September interest-rate cut is written in stone.
The Labor Department reported Friday that nonfarm payrolls grew by 114,000 in July, coming in well below economists’ estimates for 185,000. Figures for the past couple of months were revised lower, too: The new number for June payrolls was 179,000 jobs created, down from 206,000 previously. May payrolls were adjusted down slightly, from 218,000 to 216,000.
In addition to the miss in job growth, July’s unemployment rate came in at 4.3%, up from 4.1% in June and also higher than estimates, which also were for 4.1%. (Just two months ago, the May jobs report marked the end of a 27-month streak of sub-4% unemployment.)
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Here’s a brief look at the jobs report’s most pertinent details, which illustrate a still-roaring employment environment.
- July payrolls: +114,000 (vs. +185,000 est.)
- July unemployment: 4.3% (vs. 4.1% est.)
- July hourly earnings: +0.2% (vs. +0.3% est.)
- June payrolls (revised): +179,000 (vs. +206,000 previously)
- May payrolls (revised): +216,000 (vs. +218,000 previously)
“This was a bad-news is bad news report for the market and will continue the growth scare that has been roiling equities lately,” says Lara Castleton, US Head of Portfolio Construction and Strategy (PCS) at Janus Henderson Investors. “The soft landing narrative is now shifting to worries about a hard landing, and the market is increasing the odds that the Federal Reserve will have to make a [50-basis-point] cut in September.”
But she added that investors shouldn’t overreact to one negative miss: “GDP is still strong, average hourly earnings are rising, and inflation is coming down. Equities selling off should be seen as a normal reaction, especially considering the high valuations in many pockets of the market. It’s a good reminder for investors to focus on the earnings of companies going forward.”
Eric Roberts, Executive Director and Chief Executive Officer USA at Canada-based Fiera Capital, adds that July’s jobs report was likely welcome news for Fed decision-makers who wanted to see an equilibrium emerge before locking in a decision on interest-rate cuts.
“The Fed wants consistency,” he says. “More month-over-month slowdowns in wage growth, and two downward revisions, build the case for interest-rate cuts sooner rather than later.”
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Digging deeper into the July jobs report …
Despite the weak number, job losses were minimal. Information was the worst, at 20,000 jobs lost in the month; losses in other sectors such as temporary help services (-8,700) and financial activities (-4,000) were much more muted.
Meanwhile, health care had yet another brisk month at 64,000 jobs created. Construction added 25,000 jobs, leisure and hospitality gained 23,000 jobs, and transportation and warehousing added 14,000 jobs. Government employment was up, too, at 17,000 jobs gained.
“We should be careful about reading too much into one employment report, but this does provide cover for the Fed to begin cutting rates in September,” says Scott Helfstein, Head of Investment Strategy at Global X. “With unemployment jumping to 4.3%, the full employment mandate becomes more relevant.
The market is going to be schizophrenic about this jobs report. On the one hand, the already priced in September rate cut looks ever more locked. On the other hand, this was sufficiently disappointing to raise fear around economic slowdown. This might add short-term volatility to the market, but fundamentals are still sound, and earnings season has gone well.”
Expert Reactions to July’s Jobs Report
Here’s what strategists, financial managers, and other experts had to say about the July employment situation:
Ryan Detrick, Chief Market Strategist, Carson Group
“This is further proof that the economy is slowing, which has many worried the Fed is now firmly behind the 8-ball. It is becoming clear that the Fed should be more worried about the economy than inflation, which is increasing the chances of a 50-basis-point cut in September.
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“Washington drama, geopolitical worries, and now we can add a slowing economy to the picture. Bad news is back to being bad news, as investors are taking a “sell first and ask questions later” approach right now. The big question is: Are we sliding right into a recession? Or is the economy simply hitting a rough spot? We’d side with [the idea that] we will still avoid a recession, but the risks are rising.”
Josh Jamner, Investment Strategy Analyst, ClearBridge Investments
“The internals of the report were mixed, with a significant portion of the rise in the unemployment rate due to more workers entering the labor force than exiting it, as on balance job creation remains in positive territory. To that end, prime age (25-54) labor force participation surged 3/10ths to the strongest level since 2001, and while not all of these workers could be absorbed into the workforce, a still-robust 114k jobs were created. However, declines in hours worked and wages combined with the step-down in the pace of job creation are lending to worries that the Fed is behind the curve in maintaining maximum employment.”
Steve Clayton, Head of Equity Funds, Hargreaves Lansdown
“Recent days have seen Treasury bond yields tumbling, as investors grew concerned that the Fed had been slow to react to signs of weakening in the U.S. labor market. Without significant rate cuts, (space) it was argued the U.S. risked slipping toward recession, with a hard landing more likely the longer it took the Fed to begin cutting.
“Federal Reserve Chair, Jay Powell, said earlier this week that the Fed was likely on course to cut rates in September, with markets pricing in a cut of 25 points as pretty much a given. This jobs report will only heighten speculation that the Fed could move by more than 25bps when it meets in September and follow on with further cuts through to year end.”
Jack McIntyre, Portfolio Manager, Brandywine Global
“Labor market data has moved into the critical variable status for the markets and the Fed and inflation exceeding the importance of the inflation data. With that backdrop, the July employment report was weak, even if it was impacted by hurricane Beryl.
“The market thinks the Fed is behind the curve and that a 50bps rate cut might be needed in September. Just remember: Lower equity prices act to tighten financial conditions (via wealth destruction) at a time when monetary policy needs to shift toward being stimulative. We are in the window where the health (or lack thereof) starts to impact the upcoming November elections.”
Jason Pride, Chief of Investment Strategy & Research, Glenmede
“Some observers may take headline observations from the July jobs report as evidence that the Fed is behind the ball on rate cuts, but the underlying details suggest it’s not all bad news. Roughly half of the increase in the unemployment rate can be attributed to an almost half million persons increase in the size of the labor force, which should be a relatively welcome development for businesses that have been complaining of difficulties finding workers. In addition, the nonfarm payrolls figures, though lighter than expected, still showed gains, with the marginal softening concentrated in a handful of sectors (technology, temporary help and finance).
“Given how materially tight the labor market has been over the last few years, it’s perhaps not surprising to see some incremental weakening as the U.S. economy seeks to stick a soft landing. Up until now, job openings have largely borne the brunt of tight monetary policy. Now that job openings have fallen back to their pre-pandemic range, the unemployment rate has been creeping higher to the natural rate that’s largely consistent with a healthy, frictionless job market. That process continues to look like normalization instead of deterioration, but where things go from here will be key.”
