The Bureau of Labor Statistics reported Friday that employers cut 23,000 jobs in July. This is a sharp reversal from the 80,000 gain economists polled by LSEG had forecast. In the same release, the unemployment rate ticked down to 4.1% from 4.2%, a number that on its face reads as encouraging.
The two figures come from separate surveys, and reconciling them explains how a shrinking payroll count and a falling jobless rate landed in the same report. Employers told the government they wrote fewer paychecks.
Households told the government fewer people were looking for work. Both statements are accurate, and only one of them points to a healthier economy.
A falling jobless rate can mean fewer jobs, not more of them
The unemployment rate comes from a household survey, not the employer payroll count that produced the 23,000 figure. According to the BLS Employment Situation Summary, household employment fell by 87,000 in July. Yet the unemployment rate still dropped because the labor force itself shrank by 264,000 people.
When someone stops actively searching for work, the government stops counting them as unemployed, regardless of whether they have a job. Labor force participation slid to 61.4%, down 0.7 percentage points since January. Outside the Covid-era distortions of 2020, that was its lowest level since the middle of 1976.
Local government payrolls and retail absorbed most of the damage
Sector data tells a more specific story than the topline number. Local government education employment fell by 50,000 positions. It was the single largest drag on the report, likely reflecting the seasonal timing of summer school breaks.
Retail trade shed 19,000 jobs, financial activities lost 14,000, and leisure and hospitality contracted by 40,000, a decline analysts linked to the wind-down of World Cup-related hiring.
Health care kept adding positions, up 22,000, though that gain sat below its own 12-month average of 36,000 and did little to offset losses elsewhere.
Two months of prior job growth turned out to be smaller than reported
The July release also revised down May and June by a combined 103,000 jobs. May’s gain shrank from an initially reported 129,000 to 63,000, and June’s fell from 57,000 to just 20,000.
Stacked against July’s loss of 23,000, the three-month total comes to only 60,000 net jobs, an average of 20,000 a month.
That pace sits well below the prior 12-month average of 34,000, meaning the slowdown predates July and had simply gone underreported in real time.
the drop in the rate is not the reassurance it appears to be
‘Not enough workers’ is how Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, summarized the mechanics behind the falling rate.
Elise Gould, senior economist at the nonpartisan Economic Policy Institute, said that people exit the labor force when they stop seeing opportunities worth pursuing. Not when the market improves.
Nicole Bachaud, a labor economist at ZipRecruiter, said the report confirmed the labor market is not out of the woods quite yet.
Workers who kept their jobs are still watching their paychecks lose ground
Average hourly earnings rose 3.2% year over year to $37.62, missing the 3.5% economists had expected, according to data reported by Babypips. Workers on temporary layoff, those expecting to return to a prior job, jumped by 153,000 to 921,000 in July. That’s a signal that some of the softness may prove short-lived rather than structural.
Layoffs currently remain low even as hiring has slowed, which is part of why the unemployment rate has stayed contained rather than climbing.
The report reshapes the Federal Reserve’s next move
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said the unexpected job loss eases pressure on the central bank to tighten policy in the near term.
Fed officials are more likely to weigh next Wednesday’s consumer price index reading than this single jobs report. The next employment situation report, covering August, arrives September 4, giving the central bank one more data point before it meets.
The July numbers leave both sides of the economic debate with evidence to point to. Payrolls contracted for the first time in months. The unemployment rate fell to its lowest reading since before the spring’s hiring slowdown.
Neither fact cancels out the other, and neither one, on its own, tells the full story of where the labor market is headed next.
