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U.S. employment growth was weaker than expected in July while the nonfarm payrolls count for the prior two months was revised down by a massive 258,000 jobs, suggesting a sharp deterioration in labor market conditions that puts a September interest rate cut by the Federal Reserve back on the table.
The Labor Department’s closely watched employment report on Friday also showed the unemployment rate rose to 4.2% last month as household employment declined. Labor market resilience has shored up the economy amid headwinds from President Donald Trump’s aggressive trade and immigration policies.
Import duties are starting to boost inflation, raising the risk that the economy could experience a period of tepid growth and high prices, known as stagflation, which would put the U.S. central bank in a difficult position. Domestic demand increased at its slowest pace in 2-1/2 years in the second quarter.
“The president’s unorthodox economic agenda and policies may be starting to make a dent in the labor market,” said Christopher Rupkey, chief economist at FWDBONDS. “The door to a Fed rate cut in September just got opened a crack wider. The labor market is not rolling over, but it is badly wounded and may yet bring about a reversal in the U.S. economy’s fortunes.”
Nonfarm payrolls increased by 73,000 jobs last month after rising by a downwardly revised 14,000 in June, the fewest in nearly five years, the Labor Department’s Bureau of Labor Statistics said.Â
Economists polled by Reuters had forecast payrolls would increase by 110,000 jobs after rising by a previously reported 147,000 in June. Estimates ranged from no jobs added to an increase of 176,000 positions.
Payrolls for May were slashed by 125,000 to only a gain of 19,000 jobs. The BLS described the revisions to May and June payrolls data as “larger than normal.”
It gave no reason for the revised data but noted that “monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”
Economists have raised concerns about data quality in the wake of the Trump administration’s mass firings of federal workers.
Employment gains averaged 35,000 jobs per month over the last three months compared to 123,000 a year ago. Uncertainty over where tariff levels will eventually settle has made it harder for businesses to plan long-term, economists said.
Though more clarity has emerged as the White House announced trade deals, economists said the effective tariff rate was still the highest since the 1930s. Trump on Thursday slapped dozens of trading partners with steep tariffs, including a 35% duty on many goods from Canada.Â
Trump, who has demanded the U.S. central bank lower borrowing costs, stepped up his insults aimed at Fed Chair Jerome Powell, posting on the Truth Social media platform, “Too Little, Too Late. Jerome “Too Late” Powell is a disaster.”
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The Fed on Wednesday left its benchmark interest rate in the 4.25%-4.50% range. Powell’s comments after the decision undercut confidence the central bank would resume its policy easing in September as had been widely anticipated by financial markets and some economists.Â
Powell is focused on the unemployment rate. Financial markets now expect the Fed to resume its monetary policy easing next month after pushing back rate-cut expectations to October in the wake of Wednesday’s policy decision.Â
The case for a September rate cut could be reinforced by the BLS’ preliminary payrolls benchmark revision next month, which is expected to project a steep drop in the employment level from April 2024 through March of this year.
The Quarterly Census of Employment and Wages data, derived from reports by employers to the state unemployment insurance programs, has indicated a much slower pace of job growth between April 2024 and December 2024 than payrolls have suggested.
Stocks on Wall Street were trading lower on the data and latest round of tariffs. The dollar fell against a basket of currencies. U.S. Treasury yields dropped.
Shrinking Labor Pool
Job gains in July continued to be concentrated in the healthcare and social assistance sector, which added a combined 73,300 jobs. Retail employment increased by 15,700 jobs and financial activities payrolls rose by 15,000.Â
There were small job gains in the construction and leisure and hospitality industries, which economists attributed to ongoing immigration raids. Several industries, including manufacturing, professional services and wholesale trade shed jobs.
The share of industries reporting job growth, however, rose to 51.2% from 47.2% in June. Federal government employment dropped by another 12,000 positions and is down 84,000 since peaking in January. More job losses are likely after the Supreme Court gave the White House the green light for mass firings as Trump seeks to slash spending and headcount. But the administration has also said several agencies were not planning to proceed with layoffs.
The unemployment rate increased to 4.248% before rounding last month. It declined to 4.1% in June also as people dropped out of the labor force, and remains in the narrow 4.0%-4.2% range that has prevailed since May 2024.Â
The government’s immigration crackdown has reduced labor supply, as has an acceleration of baby boomer retirements. Economists estimated the economy now needs to create less than 100,000 jobs per month to keep up with growth in the working-age population.
About 38,000 people left the labor force, which was offset by a drop of 260,000 in household employment. The labor force participation rate fell to 62.2% from 62.3% in June, now down for three straight months and capping the rise in the jobless rate.
“Without the participation rate decline, the unemployment rate would have added another tenth to a solid 4.3%,” said Michael Gapen, chief U.S. economist at Morgan Stanley. “Immigration restrictions have and will continue to have a chilling effect on participation and will continue to add to downward pressure on the unemployment rate.”
The number of foreign-born workers fell by 341,000. Economists said this decline along with the drop in the labor force kept annual wage growth at a lofty 3.9%. There were more part-time workers and a jump in the number of people experiencing long bouts of unemployment. The median duration of unemployment increased to 10.2 weeks from 10.1 weeks in June.
“One gets the sense that due to trade and immigration policy the domestic economy and labor market are paying a price,” said Joseph Brusuelas, chief economist at RSM US. “Stagflation is the best description of the domestic economy as we enter the second half of the year.”
(Reporting by Lucia Mutikani; Editing by Andrea Ricci, Chizu Nomiyama and Paul Simao)
