U.S. Job Market Weakens Sharply, Fuels Fed Rate Cut Bets

The U.S. economy experienced a major slowdown in July job creation because the actual payroll numbers missed projections and revised data eliminated 258,000 jobs which now makes a Federal Reserve rate cut more likely before September. The Labor Department announced that July nonfarm payrolls increased by 73,000 jobs which fell below the projected 110,000. The revised job numbers revealed that June experienced the smallest monthly employment gain since 2017 with only 14,000 new jobs while May's employment total decreased to 19,000.

The unemployment rate increased to 4.2% because the household employment measure showed decreases. Workforce participation rates continued to decline but the rate at which people exited the workforce slowed down. Healthcare and social assistance sectors showed the majority of job growth but federal employment decreased by 12,000 and total federal jobs dropped by 84,000 since January because of government workforce reduction efforts.

The combination of weak labor market performance and stagnant domestic demand together with inflationary pressures from tariffs has increased expectations for Federal Reserve interest rate reductions. The central bank maintained its interest rates during this week and Chair Jerome Powell refused to make any statements about future rate cuts while acknowledging potential risks to the economic outlook. The September interest rate cut expectations have increased dramatically because the upcoming benchmark revision will probably reveal weaker employment data than previous reports.

The dollar value decreased and Treasury yields decreased after the data release while several economists pointed out that the U.S. economy requires only minimal job growth to maintain workforce growth because of reduced immigration and an aging population.