US Economy Loses 23,000 Jobs in July as Hiring Stalls and Rate Hike Bets Fade

By The Edge Research Team

The US economy unexpectedly shed jobs in July, with nonfarm payrolls falling by 23,000 against a Dow Jones consensus forecast of an 83,000 gain, per the Bureau of Labor Statistics and CNBC. The unemployment rate edged down from 4.2 to 4.1 percent, but for a discouraging reason: the labor force participation rate fell to 61.4 percent, its lowest in more than five years, meaning fewer Americans were working or looking for work. Markets read the report as sharply lowering the odds of another Federal Reserve rate increase, with Treasury yields and the dollar falling while gold surged past 4,400 dollars.

The details were as soft as the headline. May’s payroll count was revised down by 66,000 to a gain of 63,000 and June’s by 37,000 to just 20,000, a combined 103,000 jobs removed from prior estimates. Including July’s decline, the economy added just 60,000 jobs over the past three months, an average of 20,000 a month, and the 12-month average gain is down to about 34,000, per the BLS data and CNBC. Average hourly earnings rose just 2 cents on the month to 37.62 dollars, taking the annual pace down to 3.2 percent, below the 3.5 percent forecast, while the average private workweek held at 34.3 hours.

The declines were concentrated in local government education, which lost 50,000 positions, retail trade, down 19,000, and financial activities, down 14,000, per the BLS. Health care, the economy’s most reliable job engine, added 22,000, well below its 12-month average of 36,000, while mining, construction, manufacturing and professional services were little changed. The outsized education drop warrants some caution, our reading, since the category is prone to summer seasonal adjustment swings, though the downward revisions to May and June show the broader slowdown predates July.

The market reaction was immediate and consistent with fading rate hike expectations. The 10-year Treasury yield dropped to about 4.63 percent and the two-year, the maturity most sensitive to policy expectations, to about 4.18 percent, per CNBC. The dollar index fell about half a percent, the yen firmed to around 157.4 per dollar and the euro rose toward 1.157. Gold held its surge past 4,400 dollars an ounce at 4,404.30, up 2.44 percent on the day, while US equity futures pointed higher into the open, led by the Nasdaq, as investors priced reduced tightening risk rather than recession. Oil was slightly softer, with Brent near 81.76 dollars.

Why it matters: The report changes the balance of risks at the Federal Reserve, our reading. At its 29 July meeting the Fed held its target range at 3.50 to 3.75 percent on a 9 to 3 vote, with three policymakers preferring a quarter point increase because inflation remains elevated. Three months of hiring averaging just 20,000, downward revisions of more than 100,000 and cooling wage growth substantially weaken the case for that increase, and the first reaction in yields, the dollar and gold shows markets moving to that conclusion quickly. What the report does not do is make rate cuts the immediate base case: the cleaner reading is that the bar for further tightening has risen sharply. The equity response is the telling part, as futures rose on the bad news, which says investors still see this as a policy story rather than a recession story. That interpretation, not the payroll number itself, is what Sunday’s regional sessions will inherit.

Outlook: The next markers are how the full US session absorbs the data into the close, our reading, and how Fed officials frame the September meeting now that the labor side of their mandate is flashing caution while inflation remains above target. For the Gulf, the transmission is mixed rather than uniformly positive: lower yields, a softer dollar and gold above 4,400 dollars support rate sensitive assets, while a weakening US labor market raises questions about global demand that matter for oil, where Brent holding the low 80s is the counterweight to watch. Sunday’s regional open will largely price whether Wall Street preserves the initial relief move through Friday’s close.

Table – Market reaction, 7 August, shortly before the Wall Street open, ranked by percent change:

Sources: The US Bureau of Labor Statistics; the Federal Reserve; CNBC.

Get Complimentary Insights

Follow us