July payrolls miss, landing in negative territory
We have two big takeaways from the July jobs report. First, and hard to miss, the headline payrolls figure printed at -23k, against 80K expected and below all sell-side estimates.
This is tempered, however, by an accompanying fall in both unemployment and participation rates. Together, these dynamics leave us increasingly nervous about data quality issues. As we noted in our preview of today’s release, we think the totality of indicators points to a labour market that is more fragile than official statistics suggest. That view is only reinforced by these latest figures.
Admittedly, after digging through the data, the decline in headline payrolls is less worrying than an initial glance might suggest.
The single largest negative contribution came from local government employment, where payrolls contracted by 50k in July. Across other sectors, payrolls were little changed, with some weakness across retail offset by continued job gains in healthcare. But even so, with private-sector employment rising by 30k in total, the composition of job additions reads as less concerning.
More worrying in our eyes are the results of the Household survey. According to this latest report, the unemployment rate dipped to 4.1% in July, down from 4.2% in June and well below November’s 4.5% peak.
But as with last month’s data, the decline is more than fully explained by a continued fall in the participation rate, which now sits at 61.4%, a full percentage lower year-to-date. Such falls are not unprecedented but have historically occurred during economic contractions. Assuming this is not the case at present, then something strange is going on with the data.
That, in turn, leaves us cautious around overinterpreting this latest set of figures, even if the data remains unambiguously dovish.
This has been reflected in the market reaction, with implied September rate hike odds now at roughly 40%, down from 55% pre-release, seeing the dollar fall around 0.4% as a consequence. We remain of the view that the labour market is softening at the margin, as suggested by alternative employment indicators. Accordingly, we retain our call for no Fed rate hikes in 2026, with further downside implications for the buck.