Wall Street closed at record highs Friday after a surprisingly weak July jobs report scrambled expectations for the Federal Reserve's next move, with traders betting that a stalling labor market makes further interest-rate increases less likely in the near term.
U.S. employers cut 23,000 jobs in July, badly missing economists' consensus forecast of roughly 80,000 in gains, according to the Bureau of Labor Statistics' Employment Situation report released Friday. The agency also revised down its estimates for May and June by a combined 103,000 jobs, bringing the three-month picture well below what had previously been reported.
A shrinking workforce
The unemployment rate ticked down to 4.1% from 4.2%, but only because labor-force participation fell to 61.4% — its lowest level in more than five years — as more than 260,000 people left the workforce in July, according to NPR's analysis of the data. Local government education lost 50,000 jobs, the sharpest decline of any sector; retail trade cut 19,000 and financial activities cut 14,000, while health care added 22,000. Average hourly earnings rose just 2 cents in July and are up 3.2% year-over-year — wage growth that is now trailing estimated inflation.
Despite the weak underlying data, stocks rallied hard: the S&P 500 rose 0.62% to a record 7,757.64, the Nasdaq Composite jumped 1.3% to a record 26,690.62, and the Dow Jones Industrial Average added 151.83 points, or 0.28%, to 54,036.93. Treasury yields fell as traders trimmed bets on a near-term rate hike, with the odds of a September increase slipping from roughly 50% to 40% following the report.
The labor market is stalling again.
Heather Long, chief economist, Navy Federal Credit Union
"The payroll miss suggests the labor market may be losing momentum," said Charlie Ripley, an investment strategist at Allianz, echoing a growing chorus of economists warning that hiring has cooled well beyond the "soft landing" the Fed has been aiming for. Long, writing in comments carried by outlets including NPR, called the report "bleak."
What the Fed does next
The next Federal Open Market Committee decision is scheduled for Sept. 16, and traders are now searching the coming weeks of data — including August's jobs and inflation reports — for confirmation that the slowdown is real rather than a one-month anomaly. A weaker labor market would typically argue for rate cuts, but the Fed has also been under sustained political pressure from the White House, which has pushed for lower rates even as it separately seeks the removal of Fed Governor Lisa Cook over unrelated allegations — a dispute that adds another layer of uncertainty to the central bank's independence heading into the fall.
The scale of the downward revisions — a combined 103,000 fewer jobs across May and June — has become its own story. Revisions of that size are unusual outside of recessions, and they leave the three-month average pace of job growth well below the roughly 150,000 a month economists consider consistent with a healthy, steady labor market. The Bureau of Labor Statistics's full Employment Situation report shows the softness spread unevenly across sectors, with government education payrolls and retail bearing the brunt of the cuts while health care continued to add jobs, a pattern consistent with the sector's multi-year hiring streak.
For now, investors appear to be reading the weak jobs data as good news for stocks, on the theory that a cooling economy gives the Fed more room to ease policy. But the downward revisions have unsettled some economists, who note that the labor market's true trajectory has been harder to read in real time this year than in most of the post-pandemic recovery. Friday's rally leaves major indexes at fresh highs even as the underlying economic signal remains decidedly mixed.
