Jobs report jolts market, clouds Fed's next move US sheds 23,000 jobs in July (copy)

US ECONOMY

WASHINGTON - The U.S. economy unexpectedly shed jobs in July and previously reported job gains for the prior two months were revised sharply lower, tempering financial market expectations for an interest rate hike from the Federal Reserve next month.

While the Labor Department's closely watched employment report on Friday showed the unemployment rate falling to 4.1% last month from 4.2% in June, that was because another 264,000 people left the labor force, pushing the participation rate to a near 5½-year low of 61.4%, and hampering hiring.

Job growth, however, has a tendency to slow down during summer, a phenomenon that economists attributed to difficulties adjusting the data for seasonal fluctuations related to the timing of the end of the school year. Much of the decline in payrolls, the first in five months, was centered in local government education. There was a second straight month of job losses in the leisure and hospitality industry, attributed by economists to the fading boost from the FIFA World Cup.

Economists urged against interpreting the data as a sign of an abrupt deterioration in the labor market, with some still viewing the labor market as being in a "slow hire, slow fire" mode.

"This is the third summer in a row that we have seen unexpected weakness in the labor market," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "Policymakers broadly see the labor market as stable."

Nonfarm payrolls decreased by 23,000 jobs last month, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters forecast payrolls rising 80,000 after advancing by a previously reported 57,000 in June. Estimates ranged from as low as 10,000 to as high as 140,000 jobs added.

The economy added 103,000 fewer jobs in May and June than previously estimated. Last year's big downgrades to the two months led to President Donald Trump's firing of the BLS commissioner, Erika McEntarfer. Trump accused McEntarfer of manipulating the data. On Friday, the Senate approved career economist Brett Matsumoto to take over as BLS commissioner.

Job growth averaged 20,000 per month over the past three months. It averaged 77,000 per month in the three months through June. Financial markets priced in a 44% chance of the U.S. central bank hiking rates in September, compared with 57% before the jobs report, according to LSEG data. The Fed last week left its benchmark overnight interest rate in the 3.50%-3.75% range.

Three members of the Fed's policy-setting committee dissented, preferring a quarter-percentage-point hike. Next week's inflation data could sharpen the debate on the near-term monetary policy outlook.

Employment drag

Local government education employment dropped 49,600 last month, the most since October 2021, and contributed to a 53,000 decrease in overall government payrolls. Excluding government, private payrolls increased by 30,000, matching June's gain.

Private job growth averaged 72,000 per month this year, and some economists argued that this was a better reflection of the labor market. They expected the slump in local government to reverse in August.

Leisure and hospitality employment decreased by 40,000, losing jobs for a second straight month. Payrolls at restaurants and bars dropped by 26,100. The retail trade sector lost 19,400 jobs, the bulk of them at warehouse clubs, supercenters and other general merchandise stores.

These two sectors, which have become volatile in recent months, weighed down overall payrolls by 59,400 jobs.

The overall share of industries reporting job growth fell to 51.8% from 53.2% in June. President Donald Trump's aggressive crackdown on illegal immigration sharply reduced labor supply. The labor force decreased by more than a million this year. Further decreases are likely as hundreds of thousands of immigrants lost their protected status.

The average workweek held at 34.3 hours, which could argue against the case of labor shortages hurting hiring. Wage growth slowed, increasing 3.2% year-on-year after rising 3.4% in June. That, together with the weak payrolls, convinced some economists the Fed would not tighten monetary policy this year.

Economists estimated the economy needs to create between 20,000 and 50,000 jobs per month to keep up with growth in the working-age population. The low so-called break-even rate reflected the shrinking labor pool.

The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, has declined in six of the past seven months, and is now the lowest since February 2021. The employment-to-population ratio, viewed as a measure of an economy's ability to create employment, extended its declines and is now near a five-year low.