The US labour market showed signs of weakening in July, with employment unexpectedly declining while the unemployment rate edged lower, according to the latest report from the Bureau of Labor Statistics.
Nonfarm payrolls fell by 23,000 jobs in July on a seasonally adjusted basis, following a downwardly revised decline of 20,000 jobs in June. Economists surveyed by Dow Jones had expected an increase of 83,000 jobs.
The unemployment rate decreased slightly to 4.1%, but the decline was partly driven by a further drop in labour force participation. The participation rate fell to 61.4%, its lowest level in more than five years, suggesting fewer Americans were either working or actively searching for jobs.
Employment Revisions Point to Slower Growth
The latest report also included significant downward revisions to previous employment figures. May payroll growth was revised down to 63,000 jobs, which was 66,000 below the previous estimate.
These revisions brought the average monthly job gain over the past 12 months down to just 34,000 jobs.
“The July employment report solidified that the labor market is not out of the woods quite yet,” said Nicole Bachaud, a labour economist at ZipRecruiter.
Government and Retail Sectors Lead Job Losses
The largest employment declines came from several sectors:
- Local government education: down 50,000 jobs
- Leisure and hospitality: down 40,000 jobs
- Retail: down 19,000 jobs
- Financial activities: down 14,000 jobs
The decline in leisure and hospitality may have been influenced by the conclusion of the World Cup tournament.
Healthcare, previously one of the strongest sources of job creation, added 22,000 jobs, below its 12-month average of 36,000. Construction employment also increased by 22,000.
Private-sector payrolls rose by 30,000 jobs, but government employment fell by 53,000 jobs.
Wage Growth Slows Further
Worker pay showed little change during the month. Average hourly earnings increased by only 2 cents, bringing annual wage growth down to 3.2%.
The figure was below economists’ expectations of 3.5% growth and marked the weakest wage increase since May 2021.
Weak Jobs Data Changes Fed Rate Expectations
The report arrives as Federal Reserve officials remain divided over the future direction of interest rates. Policymakers are balancing a slowing labour market against inflation that remains above the central bank’s 2% target.
Several Fed officials recently indicated they could support a rate increase as early as September if inflation pressures remain elevated. Last week, the Federal Open Market Committee voted 9-3 to keep its benchmark interest rate unchanged.
Following the jobs report, traders reduced expectations for a near-term rate increase. According to CME Group’s FedWatch tool, the probability of a September rate hike fell to 44%, while expectations for an October move declined to 58.3%.
Markets Rally on Expectations of More Cautious Fed Policy
US stock futures rose following the employment report as investors priced in a more dovish Federal Reserve outlook.
Dow Jones Industrial Average futures gained nearly 200 points, while Treasury yields dropped sharply after initially trading near unchanged levels.
“This morning’s report is a game changer in the sense that all of the recent focus has been on inflation and this report highlights the risks that are embedded in the labor market as well,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.
He added that the data challenged the view that the Fed had no choice but to raise rates because of a strong labour market.
Participation Rate Declines as Fewer Americans Enter Workforce
Additional details from the report showed further signs of weakness.
Household employment, which measures the number of people reporting that they are employed and is used to calculate the unemployment rate, declined by 87,000.
The unemployment rate fell mainly because the labour force contracted by 264,000 people. Excluding the Covid period, the participation rate is now at its lowest level since the mid-1970s.
“While the unemployment rate is falling, that is mostly for the wrong reason—not enough workers,” wrote Bill Adams, chief US economist at Fifth Third Commercial Bank.
He noted that immigration had previously helped offset workforce aging following the pandemic, but that support has weakened.
The employment-to-population ratio also declined, falling to 58.9%, its lowest level since May 2014.
An alternative unemployment measure that includes discouraged workers and people working part-time for economic reasons remained unchanged at 7.9%.
