Although the July jobs report showed that wages rose once again, the slowest pace of hiring since late 2020 and downward revisions to the prior two month's payrolls figures likely keeps the Federal Reserve on track to leave interest rates unchanged at the next Fed meeting, experts say.
Nonfarm payrolls expanded by 187,000 last month, the Bureau of Labor Statistics said Friday, missing economists' forecast for the creation of 200,000 jobs. Adding to the evidence of an economy that's cooling, payroll figures for June were revised down to 185,000 from 209,000 new hires, while May's jobs numbers were cut to 281,000 from 306,000.
The unemployment rate, which is derived from a separate survey, ticked down to 3.5% from 3.6% to remain near 50-year lows. The unemployment rate has ranged from 3.4% to 3.7% since March 2022, the BLS notes.
Although hiring slowed last month to the lowest level since December 2020, the addition of 187,000 new jobs was still above the 183,000 monthly average recorded between 2010 and 2019. It was also higher than the 100,000 per month required to keep up with the increase in the working age population.
The July jobs report suggests that the Fed's efforts to combat inflation by cooling a squeaky-tight labor market via an aggressive campaign of interest rate hikes is having an effect. However, the fact that average hourly earnings rose 0.4% in July – or the same rate they expanded in June – shows that wage growth pressure remains to the upside. Economists were looking for wages to increase by 0.3% last month.
The central bank's rate-setting group, the Federal Open Market Committee (FOMC), will get to see another monthly nonfarm payrolls report – not to mention a slew of other economic data – before it next meets in September. As it stands now, experts say that although there's nothing in the July jobs report that forces the FOMC to raise interest rates when it next convenes, the data don't necessarily let the Fed off the hook either.
The FOMC raised the short-term federal funds rate by a quarter of a percentage point to a target range of 5.25% to 5.50% when it last met in July. The hike followed a pause in interest rate hikes at the Fed's prior meeting. Interest rate traders currently assign an 89% probability to the Fed leaving interest rates unchanged at the next policy meeting.
With the July jobs report now a matter of record, we turned to economists, strategists and other experts for their thoughts on what the data means for markets, macroeconomics and monetary policy going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.
Jobs report: the experts weigh in
"The jobs numbers this morning were just slightly below the expectations. At some point, job growth had to slow down and though many people will read this as the start of a recession, this is more likely just normalization of the economy as opposed to 'softening.' Job growth recently has been driven by non-cyclical sectors, like health care, education and government. These sectors had lagged in the original recovery but have accounted for more than 50% of job creation in 2023 as opposed to 25% in 2022. The cyclical sectors have been on the softer side this year, and this report points to more of the same. The unemployment rate fell a tick to 3.5% indicating that the labor market remains strong. Strong employment and strong wage growth means income growth is still strong, which is positive for consumption and the economy, as long as inflationary pressure remains muted." – Sonu Varghese, global macro strategist at Carson
"Job growth slowed in July but the labor market is still very strong, with the unemployment rate a hair's breadth from a half-century low and wage growth solid. With the labor market very strong, wages rising solidly, and core inflation well above the Fed's target, odds are better than 50-50 that the Fed makes another quarter percentage point rate hike in the second half of 2023, most likely at the Fed's November 1 decision. That would have the Fed skipping a rate hike at the next decision in September, like they did in June, in recognition that interest rates are probably near the peak for this cycle." – Bill Adams, chief economist at Comerica Bank
"Below-consensus job growth – combined with higher average hourly earnings – signals that more progress is needed to reduce the jobs-workers gap, slow wage growth and, ultimately, lower inflation. The Fed has likely ended its most aggressive tightening campaign in generations, with a reasonable path to a soft landing. However, we recognize that there is still a wide range of possible outcomes, with risks tilted towards additional hikes should inflation remain sticky, though not our base case." – Candice Tse, global head of strategic advisory solutions at Goldman Sachs Asset Management
"The bulls went two-for-three because the top-line number and work week missed estimates, while wages were higher than expected. Combined with the downward revisions for May and June, today's report suggests the red-hot labor market is cooling a bit. That gives some comfort to investors worried about spiking interest rates. Goldilocks isn't dead yet." – David Russell, vice president of market intelligence at TradeStation
"A slower pace of hiring in July showed that the labor market continues to gradually cool. The sideways trend in the unemployment rate for more than a year now has come despite steady gains in the labor supply. The overall labor force participation rate has held steady at 62.6% for a fifth consecutive month, which in today's environment of rapid population aging is effectively up. Yet despite an improving supply picture and more temperate demand, wage growth remains elevated. Overall, the labor market is only slowly coming back into balance, which is likely to keep the Fed guarded in its optimism about how quickly inflation can fade on a sustained basis." – Sarah House, senior economist at Wells Fargo Economics
"This print, alongside the similarly strong unemployment rate and average hourly earnings, will keep the hawks vigilant. Although these figures imply economic resilience, leading indicators have long been signaling a recession and employment is infamously a lagging indicator. Bottom line, this report is good news and helps kick the can down the road, but it wouldn't be uncommon for NFP to hold up until months after the start of a recession and wary investors should closely watch employment and corporate profits from here. It's too early to say that 'hard landing' should totally exit the conversation." – Adam Hetts, global head of multi-asset at Janus Henderson Investors
"The unemployment rate dropped to 3.5% which is one of the lowest readings in decades. In terms of leading indicators, temp jobs continue to drop; they were down 22,000. This is consistent with our theme of softening employment (easier to cut jobs). The bottom line is things are slowing but as we've continually said this cycle takes time and for now the labor economy is strong and likely keeps the Fed on their toes and another hike is still likely in the cards." – John Luke Tyner, portfolio manager at Aptus Capital Advisors
"The Fed will take comfort from moderating job growth, but will continue to fret about the tight labor market. So far, the July employment and CPI reports are a wash for the Fed's September 20 decision (we expect no change in rates), placing extra pressure on the August releases to add some clarity." – Sal Guatieri, senior economist at BMO Capital Markets
"Employment growth was lower than expected for a second month in a row at a time that analysts seem to have changed their view on economic activity and are now expecting the economy to accelerate rather than slow down going forward. Today's number illustrates that the U.S. jobs market continues to move into balance and that labor market pressures are continuing to weaken. This is good news for Federal Reserve policymakers. Once again, the health care and social assistance sector led the way in July, adding 100,000 jobs while temporary help services, which are typically considered a leading indicator for the jobs market, cut about 22,100 positions during the month, potentially signaling further weakness in job creation down the road." – Eugenio Alemán, chief economist at Raymond James
"While headline numbers were below-consensus, the July jobs report affirms a cooldown, rather than collapse, in the labor market against rising interest rates and tightening economic conditions. The unemployment rate trended down to 3.5%, new job openings exhibited modest deceleration, and average hourly earnings remained unchanged, but at historically low levels of growth, suggestive that the labor market is losing momentum at a healthy pace. These trends offer further support for the possibility of a soft-landing, which will require the Fed to synchronize its timing on monetary policy with the pace of deceleration in the labor market." – Noah Yosif, economist at the National Association of Federally-Insured Credit Unions
"The U.S economy added another 187,000 jobs in July, while unemployment and labor force participation rates were relatively unchanged. Maybe the most remarkable thing about this report, where most labor metrics are holding steady, is just how unremarkable it is. The labor market is cooling, but it is also proving incredibly resilient to the Fed's aggressive rate tightening and continues to chug along toward a potential soft landing." – Jesse Wheeler, senior economist at Morning Consult
"Today's report revealed that the labor market continues to cool as hiring plans modestly fade. At the same time, companies are not letting workers go and, if anything, are continuing to offer enticements to keep them. Fewer jobs were added than expected, the second consecutive 'miss' versus forecast – however, wage growth was stronger than expected and the unemployment rate declined. The Fed will view this report as further confirmation that their stance to 'wait and see' is appropriate as they collect and analyze more data prior to their next meeting in September. The net-net of this report: the labor market is slowing, but still growing." – George Mateyo, chief investment officer at Key Private Bank
"The U.S. jobs report was near expectations for July, but the labor market is softening as many employers navigate changing circumstances. As the Fed works to curb inflation by raising rates to slow the economy, monthly jobs numbers provide a key measure of the impact and they continue to show the resilience of the economy." – Eric Merlis, managing director, co-head of global markets at Citizens
"There's no doubt in my mind that business owners wanted to create more jobs in July, but there's just not enough people out there looking for work. Labor participation is high and the labor market remains incredibly tight. This combination, if left unchanged, will lead to another round of wage inflation in the next six to 12 months. Labor demographics have fundamentally changed since the start of the pandemic. Employers — especially those with large frontline workforces — should continue to invest in their existing workforce and expand their recruitment channels." – Chris Todd, CEO at UKG
"As has been the case with all the reports of late, the July employment data served up a confusing set of internals. But in aggregate, there is no mistaking the cooling-off that is taking hold in the U.S. jobs market, and the leading indicators suggest more erosion is on its way." – David Rosenberg, founder and president of Rosenberg Research
"For investors, this 'something for everyone' report likely means that the trends in markets of late will continue. However, we must remain a bit cautious as headwinds persist…yields are high, energy costs are rising once again and the reaction to the recent downgrade of U.S. debt could all put downward pressure on equities and higher yields on bonds in the near term. Inflation is still higher than the Federal Reserve believes it should be, yet data has been showing mostly a slowing to declining rate in the last few months demonstrating that we could have a shallow recession or a soft landing. Overall, the markets will likely be range-bound until we have a catalyst that helps to clarify economic conditions." – Seth Cohan, vice president and executive director at The Wealth Alliance
"While the non-farm payrolls number came in below estimates, 187,000 is solid job creation during July. This, coupled with the stronger than expected earnings growth, likely keeps the pressure on the Fed. The market has been pricing the end of the hiking cycle, but continual strong data may lead to additional hikes. We are watching the trend of the yield curve steepening out of inversion closely as historically it has been an ominous signal for risk assets." – Michael Hadden, senior portfolio manager at Brinker Capital
