US Payrolls Miss Expectations: Job Growth Slows Sharply in July

US Payrolls Miss Expectations: Job Growth Slows Sharply in July 

We speculated on just how dire the payroll numbers might be, and this morning the Bureau of Labor Statistics delivered the news. In July, the U.S. added only 114,000 jobs, significantly below the anticipated 175,000 and a sharp decline from June's downwardly revised figure of 179,000, which was initially reported as 206,000. This marks the weakest job growth since December 2020.

This 3-sigma miss to the median estimate underscores the severity of the situation. Predictably, previous months' figures were revised downwards, as is typical with these reports. May's employment was adjusted down by 2,000 to 216,000, and June's figure saw a more substantial reduction by 27,000 to 179,000. Together, these revisions reveal that May and June's employment numbers were 29,000 less than initially reported. Notably, five of the past six months have seen downward revisions.

This month, the Household and Establishment surveys finally aligned, though the Household survey showed a much smaller increase of just 67,000 employed individuals. This suggests that while the official payroll numbers are peaking, actual employment hasn't changed significantly over the past year.

Adding to the skepticism, the Birth/Death model introduced 246,000 "statistical" jobs to the unadjusted figures, making the adjusted payroll numbers look much better than they likely are.

What stands out in the data is the suggestion that the U.S. is slipping into a recession. The Sahm Rule, which indicates a recession if the unemployment rate rises by half a percentage point from its lowest point in the past year, has been triggered, with unemployment climbing 0.6% from the year's low.

The current unemployment rate of 4.3% was partly influenced by a temporary increase in layoffs due to Hurricane Beryl, suggesting the rate might decrease to around 4.1% next month unless the Democrats leverage the Sahm recession in their election strategy.

Unemployment rates increased across all major ethnic groups except for Blacks, with Hispanics experiencing their highest unemployment rate in two years. The labor force participation rate inched up to 62.7% from 62.6%, exceeding expectations.

Further details from the report show a rise in part-time employment for economic reasons by 346,000 to 4.6 million and an increase in the number of people not in the labor force who want a job by 366,000 to 5.6 million. Those marginally attached to the labor force remained steady at 1.6 million, while the number of discouraged workers saw little change.

Wages also underperformed, with average hourly earnings rising only 0.2% in July, below the expected 0.3%. The annual growth rate was 3.6%, falling short of the 3.7% expectation and down from the revised 3.8% in June. The average workweek decreased slightly, further impacting earnings growth.

Employment trends show increases in healthcare, construction, and transportation and warehousing, while the information sector saw job losses. Government employment changed little, and other major industries remained mostly stable.

Bloomberg economists noted that July's job report indicates a cooling labor market with no signs of stabilization. Some of the payroll weakness is attributed to Hurricane Beryl, but the rise in unemployment is primarily due to layoffs and prolonged job searches. They also highlighted that the Bureau of Labor Statistics' Birth/Death model likely overstates employment from new firms, suggesting real monthly job growth is below 100,000.

RBC analyst Janet Mui concurs, predicting that the Fed might cut interest rates more aggressively than previously anticipated, with a 50-basis point cut now possible, as market reactions indicate concerns over economic growth.