- Key insight: The labor market remains at or near full employment — as it has for roughly the past five years — but the negative reading bolsters the argument of a softening labor market as the Federal Open Market Committee weighs a rate hike in September.
- Expert quote: "Several factors could explain why employers are not hiring as much as they did in the recent past, including longer-term structural shifts, pandemic-era over-hiring, or increased work from home." — Federal Reserve Gov. Lisa Cook
- Forward Look: The July jobs report is the first major economic indicator to come out since the last Federal Open Market Committee meeting. Inflation readings from July and August as well as this month's employment data will all factor into the FOMC's next vote in September.
The U.S. workforce shrunk in July, falling short of expectations even as the unemployment rate fell slightly, bolstering arguments both for and against a Federal Reserve rate hike next month.
The Bureau of Labor Statistics released its latest jobs report on Friday morning showing the economy shed 23,000 jobs in July, though a decline in the number of Americans seeking work meant the unemployment rate also declined to 4.1%. The reading likely maintains the status quo for policymakers on the Federal Open Market Committee who have been more concerned about inflation than the job market in recent months.
"The labor market has stabilized with solid payroll growth and an unemployment rate close to its longer-run value," Federal Reserve Bank of St. Louis President Alberto Musalem said in a speech in Brazil on Thursday evening. "However, inflation is well above the FOMC's 2% target, and the balance of risks is tilted toward inflation remaining above target a year or more from now."
The report also revised down its May and June estimates by 66,000 and 37,000 hires, respectively, tarnishing what had been a promising run of growth in the series dating back to March. After the changes, the job market has added just 60,000 jobs over the past three months.
Data dependent
Friday's BLS report is the first of several major economic indicators set to be released before the FOMC's next monetary policy meeting, including another unemployment print next month and a pair of inflation readings.
During last week's FOMC meeting, the committee voted 9-3 to keep the target range for the federal funds rate between 3.5% and 3.75% despite concerns about rising inflation. At the same time, Fed Chair Kevin Warsh
Markets are roughly evenly split on whether the FOMC will raise interest rates in September, with 54.5% of federal funds futures contracts pricing in a hike and the rest expecting no change, according to the CME Group's Fedwatch tool. More than 80% of futures traders expect at least one quarter-point rate hike by the end of the year, but the range of forecasts is broad.
During his post-FOMC press conference, Warsh said he subscribes to the traditional central banking philosophy that policy should be tightened when employment is full and inflation is above target. He also emphasized that the Fed would have no tolerance for sustained rapid price growth.
"Let me reiterate: There is no soft inflation target, there is no soft implicit target — not on this Committee's watch," he said. "There is only a target, and it is 2%."
Still, Warsh declined to explain why exactly the committee chose not to raise rates or provide any signal about what would warrant a hike in the future.
Meanwhile, the three dissenting voters on the committee — Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan — all explained their rationales as being rooted in a fear of inflation getting out of hand.
"Labor, consumption and financial market conditions indicate that monetary policy is not restraining the economy," Logan said
Slow growth, lingering uncertainty
Market analysts expected U.S. payrolls to grow by 100,000 in July. This is the second month in a row that the consensus forecast has not been met. Yet, despite these shortfalls, the unemployment rate has changed very little in recent months.
"The unemployment rate has been remarkably steady, fluctuating only between 4 and 4.5 percent since June 2024 and currently standing at 4.2 percent, near what I consider to be full employment," Federal Reserve Bank of Philadelphia President Anna Paulson wrote in an essay this week.
Paulson, a voting member of the FOMC, voted in favor of holding interest rates steady. In her essay she expressed optimism that inflationary pressures would abate on their own while also acknowledging some potential fragilities in the labor market that are not captured by the BLS data.
"Employers tell me that layoffs are infrequent," she said. "Despite this, surveys suggest that workers are worried about job security and that jobseekers are pessimistic about finding work."
In a
Still, Cook — who also voted in favor of holding rates steady — said there is no evidence of widespread, AI-induced job loss. Instead, she said, the main trend shaping the employment outlooking is the fact that employers are hiring and firing at a lower rate.
"Several factors could explain why employers are not hiring as much as they did in the recent past, including longer-term structural shifts, pandemic-era over-hiring, or increased work from home," Cook said. "However, international and state-level evidence suggests that low hiring rates, when they reflect slow population growth, do not signal an impending downturn by themselves."
