U.S. Nonfarm Payrolls Declined by 23,000 in July Amid Labor Force Drop

U.S. nonfarm payrolls registered an unexpected decline of 23,000 in July, sharply contrasting with the consensus expectation of an 80,000 gain. This figure was further exacerbated by downward revisions totaling 103,000 for May and June payrolls, resulting in a net decrease of 126,000 jobs after revisions. Concurrently, an alternative measure of employment, civilian employment, also saw a notable drop of 87,000, corroborating the broader weakening trend in job creation. While the unemployment rate ticked down to 4.1% from 4.2% in June, this improvement was attributed to a 264,000 reduction in the labor force—individuals actively working or seeking employment—rather than robust job growth. This suggests a less favorable underlying trend for the labor market despite the headline unemployment rate decrease.

Despite the overall decline, the private sector showed some resilience, adding 30,000 payrolls in July, though this was offset by a 55,000 downward revision for prior months. Sectoral performance varied, with construction and healthcare each adding 22,000 jobs. Conversely, leisure and hospitality saw the most significant contraction, shedding 40,000 positions, followed by retail trade (-19,000) and financial activities (-14,000). Manufacturing recorded a modest gain of 5,000 jobs, while government employment notably decreased by 53,000, largely driven by an unusual 50,000 drop in local government education workers. This specific decline in public sector employment is identified as a primary contributor to the overall nonfarm payroll reduction for the month.

The subdued labor market report, particularly the modest increase in average hourly earnings, carries significant implications for monetary policy. Average hourly earnings rose only 0.1% in July, bringing the year-over-year growth to 3.2%. Aggregate hours worked remained flat for the month, though they are up 0.7% from a year ago. This moderation in wage growth, alongside the overall decline in employment, is likely to ease concerns about inflationary pressures. Such data points could make it more challenging for the Federal Reserve to consider raising interest rates at its upcoming September meeting, as a cooling labor market typically reduces the urgency for tighter monetary policy.

Over the past year, nonfarm payrolls have averaged a gain of 26,000 per month, during which period the jobless rate has fallen from 4.3% to 4.1%. This trend suggests that even with slow growth, unemployment can decline. Other indicators in the labor market generally remain solid, with new claims for jobless benefits rising slightly by 1,000 to a still-low 199,000 last week, and continuing claims increasing by 24,000 to 1.801 million, which is also considered low. Furthermore, productivity, measured as output per hour, advanced at a 1.4% annual rate in the second quarter and is up 2.2% over the year—exceeding the 50-year trend of 1.8%. Unit labor costs, reflecting the cost of labor for each unit of output, rose at a 1.3% rate in Q2 and are up just 1.4% year-over-year. These figures, remaining below the Federal Reserve's 2.0% inflation target, provide the central bank with flexibility to maintain a patient stance on interest rate adjustments.

Key terms:

1. Nonfarm Payrolls: A measure of the total number of paid employees in the U.S. excluding farm workers, government employees, private household employees, and non-profit organization employees.

2. Unemployment Rate: The percentage of the total labor force that is unemployed but actively seeking employment and willing to work.

3. Average Hourly Earnings: The average amount of money earned per hour by employees, used as an indicator of wage growth and inflationary pressures."}))VIP U.S. Nonfarm Payrolls Declined by 23,000 in July Amid Labor Force Drop

U.S. nonfarm payrolls registered an unexpected decline of 23,000 in July, sharply contrasting with the consensus expectation of an 80,000 gain. This figure was further exacerbated by downward revisions totaling 103,000 for May and June payrolls, resulting in a net decrease of 126,000 jobs after revisions. Concurrently, an alternative measure of employment, civilian employment, also saw a notable drop of 87,000, corroborating the broader weakening trend in job creation. While the unemployment rate ticked down to 4.1% from 4.2% in June, this improvement was attributed to a 264,000 reduction in the labor force—individuals actively working or seeking employment—rather than robust job growth. This suggests a less favorable underlying trend for the labor market despite the headline unemployment rate decrease.

Despite the overall decline, the private sector showed some resilience, adding 30,000 payrolls in July, though this was offset by a 55,000 downward revision for prior months. Sectoral performance varied, with construction and healthcare each adding 22,000 jobs. Conversely, leisure and hospitality saw the most significant contraction, shedding 40,000 positions, followed by retail trade (-19,000) and financial activities (-14,000). Manufacturing recorded a modest gain of 5,000 jobs, while government employment notably decreased by 53,000, largely driven by an unusual 50,000 drop in local government education workers. This specific decline in public sector employment is identified as a primary contributor to the overall nonfarm payroll reduction for the month.

The subdued labor market report, particularly the modest increase in average hourly earnings, carries significant implications for monetary policy. Average hourly earnings rose only 0.1% in July, bringing the year-over-year growth to 3.2%. Aggregate hours worked remained flat for the month, though they are up 0.7% from a year ago. This moderation in wage growth, alongside the overall decline in employment, is likely to ease concerns about inflationary pressures. Such data points could make it more challenging for the Federal Reserve to consider raising interest rates at its upcoming September meeting, as a cooling labor market typically reduces the urgency for tighter monetary policy.

Over the past year, nonfarm payrolls have averaged a gain of 26,000 per month, during which period the jobless rate has fallen from 4.3% to 4.1%. This trend suggests that even with slow growth, unemployment can decline. Other indicators in the labor market generally remain solid, with new claims for jobless benefits rising slightly by 1,000 to a still-low 199,000 last week, and continuing claims increasing by 24,000 to 1.801 million, which is also considered low. Furthermore, productivity, measured as output per hour, advanced at a 1.4% annual rate in the second quarter and is up 2.2% over the year—exceeding the 50-year trend of 1.8%. Unit labor costs, reflecting the cost of labor for each unit of output, rose at a 1.3% rate in Q2 and are up just 1.4% year-over-year. These figures, remaining below the Federal Reserve

Source: This article is adapted from First Trust Portfolios' Data Watch commentary on this data release. The original is available at ftportfolios.com.