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Data released by the U.S. Bureau of Labor Statistics (BLS) on August 7 showed that July nonfarm payrolls unexpectedly decreased by 23,000—far below economists’ expectations of an 83,000 gain. Meanwhile, May and June figures were significantly revised downward by a combined 103,000 jobs—May was cut from a gain of 129,000 to 63,000, and June from 57,000 to 20,000. The three-month average now stands at just 20,000 new jobs per month, a clear signal of labor market cooling.
Job losses concentrated in a few sectors
By industry, job losses were mainly concentrated in local government education (-50,000), retail trade (-19,000), and financial activities (-14,000). Healthcare, which had previously been viewed as the most resilient sector, added 22,000 jobs in July, becoming one of the few bright spots.
Notably, despite the net decline in total employment, the unemployment rate fell from 4.2% to 4.1%. But this is not good news—the reason lies in the labor force participation rate dropping to 61.4%, down 0.8 percentage points from a year earlier, meaning fewer Americans are actively looking for work. The share of the population actually holding a job also fell to 58.9%. The decline in the unemployment rate masks the true weakness in the labor market.
Inflation persists, leaving the Fed in a dilemma
Typically, a weakening job market would be accompanied by a pullback in inflation, but that is not the case this time. Although the June Consumer Price Index (CPI) fell 0.4% month-over-month, the decline was largely driven by lower energy prices, while core CPI was flat for the month. The Federal Reserve’s preferred inflation gauge—the Personal Consumption Expenditures (PCE) price index—remains elevated at 3.7% year-over-year, well above the 2% target.
A greater concern lies in geopolitics. The ongoing Iran conflict continues to disrupt global oil supplies, raising the possibility of further inflationary pressures. Fed Chair Warsh made it clear at the July FOMC meeting that “2% is the inflation target,” prioritizing price stability above employment. The July meeting saw a 9-3 vote to hold rates steady, with the three dissenters all advocating for an immediate 25-basis-point hike—a notable division within the central bank.
September rate hike probability drops to 44%, providing short-term market relief
Following the jobs report, market-implied odds of a September rate hike fell sharply from approximately 57% to roughly 44%. In other words, a weakening labor market may deter the Fed from raising rates to combat inflation, for fear of worsening employment conditions.
For investors, the cooling of rate expectations provided a short-term boost to equities—the S&P 500 rose 0.62% on the day. The logic is simple: when interest rates rise, money tends to flow out of equities and into bonds, and the reverse holds true when rates are low. However, reality is far more complex. If markets perceive runaway inflation as a genuine risk, capital may still flow to bonds even if the Fed holds off on rate hikes.
Key upcoming data points
The next important windows to watch are July CPI data due on August 12 and August employment figures scheduled for September 4.The most ideal scenario would be simultaneous improvement in both datasets, providing the Fed with a clear policy path forward. The worst-case outcome would be a sharp uptick in inflation coupled with a sudden drop in employment—which would put the Fed in a truly intractable policy predicament. Until then, markets will continue to oscillate between the competing forces of “stubborn inflation” and “weakening employment.”
