Key facts
- The July jobs report indicated a contraction of 23,000 payroll jobs, contrary to an expected gain of 83,000.
- Average job gains over the last three months were 21,000, with hourly earnings growth slowing significantly.
- The unemployment rate fell to 4.1% in July from 4.2% in June.
- Market expectations for a September Fed rate hike decreased to below 50% from 67% a week prior.
- Fed officials are prioritizing inflation trajectory over the jobs report for future rate decisions.
The July jobs report revealed a contraction in payroll employment, significantly diminishing the urgency for the Federal Reserve to implement an interest-rate hike at its upcoming September meeting. Payroll employment fell by 23,000 in July, a stark contrast to the 83,000 gain anticipated by Wall Street economists. The report also indicated broader weakness, with job gains averaging only 21,000 over the past three months and hourly earnings rising at their slowest pace since May 2021.
Richmond Fed President Tom Barkin indicated that the jobs report had not changed his perspective on a stable U.S. economy, characterizing the labor market as being in a "weak balance" for the past 18 months with a low-hire, low-fire equilibrium. Many Fed officials have also emphasized the importance of the unemployment rate, which remained low and decreased to 4.1% in July from 4.2% in June.
Market participants reacted by lowering their expectations for a September rate hike, with derivative market traders reducing their probability estimates to below 50% from 67% a week prior. Analysts at Payden & Rygel still anticipate the Fed may lean towards rate hikes, not due to labor market overheating, but because of persistent inflation concerns. However, they noted that weak job growth could provide a reason for more cautious Fed members to delay further hikes.