Job creation in July slowed to 73,000 in July on the back of a large downward revision of 258,000 in May and June, capturing a big chill spreading out over the domestic economy and labor market.
In addition, the unemployment rate rose to 4.2%, but that increase was partially masked by the exit of 341,000 foreign-born workers from the economy. All of these factors are likely a function of new trade and immigration policies.
The July jobs data was the worst major economic report in the post-pandemic era and opens the door for a more robust discussion over the wisdom of a rate cut at the next Federal Open Market Committee meeting, in September.
Once one excludes the 79,000-job increase in private education and health care, there was a net decline in hiring elsewhere in July. More important, leisure and hospitality added only 5,000 jobs during a month that typically has a seasonal boost. Hiring in that category was also revised down to an increase of 4,000 positions in June.
The big question is: Why has hiring cooled?
In addition to the weak gains in leisure and hospitality, the report showed a decline of 13,000 positions in goods-producing industries and 11,000 in construction, as well as a weak 2,000-job increase in construction.
One gets the sense that the domestic economy and labor market are paying a price for the new trade and immigration policies.
Get Joe Brusuelas’s Market Minute economic commentary every morning. Subscribe now.
The number of foreign-born workers declined by 341,000 in the report. With weakness in industries that rely upon migrant workers, including goods production, construction, manufacturing, and leisure and hospitality, these policies are having a real impact.
The decline in foreign-born workers, which contributed to the overall decline in the labor force of 38,000 workers, probably resulted in firms paying more for workers. Average hourly earnings increased by 0.3% on the month and by 3.9% over the past year.
Private sector hiring slowed to 83,000, which improved over the downwardly revised increase of 3,000 in June and 69,000 in May.
On a six-month average, private sector hiring has slowed to 84,830, and over the past three months it has slowed to an average of 51, 666.
Policy implications
A much softer trend in hiring will boost the chances of a September rate cut. But with another employment report still to come before the Fed’s next meeting and more inflation data yet to be reported, we have embarked on a period where tariff-induced inflation has started to drive hard pricing data higher.
All focus will be on the Fed’s language and rhetoric at its September meeting. For now, we are maintaining our view that the Fed will not cut rates until December at the earliest.
The data
Along with the overall increase of 83,000 workers in total private hiring, hiring by private service providers increased by 96,000 in July. Trade and transport hiring rebounded modestly by 11,000 jobs off the back of a downward revision of 22,000 in June and 11,000 in May.
Retail trade added 16,000 jobs following downward revisions of 14,000 in June and 15,000 in May.
The information sector lost 2,000 jobs on the month, professional business services employment dropped by 14,000, while total government hiring declined by 10,000. The financial sector added 15,000 positions in July.
Average hourly earnings on a three-month average annualized basis increased by 3.7% while average weekly earnings increased by 4.2% from a year ago.
Total private hours worked increased by 0.3% on the month and overtime was flat. Aggregate hours worked increased by 0.3% in July.
The labor force participation rate dropped to 62.2% while the employment-to-population ratio eased to 59.6%. There are currently 7.23 million unemployed workers, which increased by 221,000 in the month. The median duration of unemployment stands at 10.2 weeks.
The takeaway
A big chill in demand for labor has descended over the economy over the past three months. A softer pace of growth is resulting in a cooler rate of hiring, all while inflation is creeping into hard pricing data.
Stagflation lite is the best description of the domestic economy as we enter the second half of the year. We expect hiring to drop below 100,000 a month. Now, with a net decline of 258,000 jobs in May and June, as well as the weak gain of 73,000 jobs in July, that dynamic appears to be well under way.
Now the question is: What to do about it?
