Weaker Jobs Report Supports Expectations for a September Rate Cut

This morning, nonfarm payrolls rose by 114k in July, falling short of the 175k gain expected and the weakest increase in three months. The three-month average, however, ticked up slightly from 168k to 170k.

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June payrolls were revised down from a 206k gain to a 179k increase. With additional revisions to previous months, the?overall change in nonfarm payrolls (July data + net revisions) was just 85k.

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In the details, private payrolls rose by 97k in July following a 136k gain in June. Goods-producing payrolls increased by 25k, due to a 25k gain in construction payrolls and a 1k rise in manufacturing payrolls.

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Private service producing payrolls rose by 72k in July following a 125k gain in June. Education and health payrolls led the gain in July, rising 57k, down from the 79k gain the month prior. Leisure and hospitality payrolls increased 23k in July, and trade and transport payrolls climbed 22k, with a 4k gain in retail trade payrolls. On the weaker side, professional and business services payrolls fell 1k, due to a 9k drop in temporary help payrolls, financial payrolls fell 4k, and information payrolls plunged 20k, the largest monthly decline since October. Finally, government payrolls rose by 17k in July following a 43k gain in June.

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Household employment rose by 67k in July following 116k gain in June. The labor force, meanwhile, increased by 420k following a 277k rise in June. Thus, the unemployment rate unexpectedly ticked up from 4.1% to 4.3% in July, the highest since October 2021. According to the median forecast, the unemployment rate was expected to remain at 4.1% for a second consecutive month.

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The labor force participation rate, meanwhile, unexpectedly ticked up from 62.6% to 62.7% in July, a three-month high. According to the median forecast, the participation rate was expected to remain at 62.6% for a second consecutive month.

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Also, average hourly earnings rose 0.2% in July, a tenth of a percentage point less than expected and following a 0.3% increase in June. Year-over-year, wages rose 3.6%, down from a 3.8% gain in June and the smallest annual increase since May 2021.

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Finally, the average workweek fell from 34.3 to 34.2 hours in July, a six-month low.

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Bottom Line: A weaker-than-expected July employment report underscores rising concerns of a cooling labor market. But while this is certainly a feather in the cap of the doves anxious to cut in September, there remains another round of employment data and five key inflation reports (August CPI, PPI and PCE and September CPI and PPI) between now and September 18th.?

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Should price pressures weaken more than expected as they did in the July employment data, a September rate cut is likely to become a reality. However, should inflation fail to improve or offer the needed confidence the Committee so desperately desires, a first-round cut may still be pushed out beyond investors’ expectations. As the Fed remains data dependent, to say there is a lot riding on the next data points is an economic understatement.

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Yesterday, initial jobless claims rose 14k from 235k to 249k in the week ending July 27, the highest in a year. The four-week average increased from 236k to 238k. Containing claims, or a measure of the total number of people receiving unemployment benefits, rose from 1.84M to 1.88M in the week ending July 20, the highest since November 2021.

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Also yesterday, nonfarm productivity rose 2.3% in the second quarter, more than the 1.8% gain expected and the largest increase since Q4 2023. Unit labor costs rose 0.9% in the second quarter, less than the 1.7% increase expected and the weakest pace in two quarters.

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On the manufacturing side, the final July print of the S&P Global U.S. Manufacturing Index ticked up slightly from 49.5 to 49.6.

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Finally yesterday, the ISM Manufacturing Index unexpectedly fell from 48.5 to 46.8 in July, now marking the fourth consecutive month in contractionary territory (a reading below 50) and the lowest reading in eight months. According to the median forecast, the index was expected to rise to 48.8.

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In the details of the report, supplier deliveries rose from 49.8 to 52.6, the highest reading since August 2022, and prices paid rose by 0.8 points to 52.9 in July, a two-month high and averaging 55.2 over the past six months. On the other hand, new orders fell 1.9 points to 47.4, a two-month low, employment declined nearly six points to 43.4 in July, the lowest reading in four years. Also, inventories fell from 45.4 to 44.5, production slipped 2.6 points to 45.9, while backlog of orders remained steady at 41.7 in July for the second consecutive month.

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Next week the economic calendar is quite light, beginning on Monday with a look at the final S&P Global U.S. Services and Composite PMIs for July, and the July ISM Services Index.

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Last month, services activity unexpectedly dropped back into contractionary territory (or a reading below 50) declining five points to 48.8 in June, the lowest reading since May 2020. This month, services activity is expected to move back into expansionary territory at a reading of 51.3 in July.

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On Tuesday, we take a look at the June trade balance, followed by weekly mortgage applications on Wednesday along with consumer credit.

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Later in the week, on Thursday, weekly jobless claims and wholesale inventories for June.

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Finally, backing up to Monday, on the Fed front, the latest SLOOS report – or the Senior Loan Officer Opinion Survey on Bank Lending Practices – will be released. We will also hear from San Francesco Fed President Mary Daly, Chicago Fed President Austan Goolsbee and Richmond Fed President Thomas Barkin. In the aftermath of a somewhat more hawkish Fed statement in July, investors will be hanging on to every word by Fed officials to glean any updated assessment of the Fed’s latest decision in the aftermath of the July employment report.

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-Lindsey Piegza, Ph.D., Chief Economist