July jobs report shows payroll decline, bolstering case for steady Fed rates
July payrolls fell short of expectations, prompting some Federal Reserve officials to favor holding interest rates steady while inflation data remains a key focus.
July nonfarm payrolls decreased by 23,000, far below the projected gain of 80,000, and revisions cut May and June job gains by a total of 103,000. The unemployment rate slipped to 4.1% from 4.2% as labor-force participation continued to decline, down 0.7% since January. Job losses were concentrated in local government education, retail and finance, while healthcare added 22,000 positions.
"Although the hiring weakness in the July employment report has not been reflected in the broader set of labor market indicators, it is still likely to revive concerns among Fed officials about the health of the labour market and make them less inclined to commit to near-term tightening," said Thomas Ryan, senior economist at Capital Economics.
"Overall, it's going to take a meaningful upside surprise in the price data next week for the Fed to hike interest rates as soon as September," he added.
Richmond Fed President Tom Barkin described the report as "very consistent with how I've been seeing the labor market, which is, it's not loose, it's not tight, it's sort of been a weak balance." He noted that employers are neither hiring nor firing in large numbers and highlighted demographic factors limiting workforce growth.
"We're in a zero-ish workforce growth environment, and we're in a zero to modest to positive jobs growth environment," Barkin said.
Fed Governor Lisa Cook, who advocated holding rates steady at the July meeting, warned that she would support a rate increase if inflation does not ease, noting that existing disinflationary forces could lower inflation without higher rates.
"I would support an increase if it becomes necessary to bring inflation down. It may not," Cook said.
Analysts said the weak payrolls may reduce pressure on the Fed ahead of its September meeting, but upcoming inflation figures will likely determine the policy direction.
"If those numbers come in hotter than expected, a cooler labor market may not be enough to quiet the calls for hikes inside the Fed, or lower expectations outside of it," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.