US Labor Market Weakness Intensifies with Record Downward Revisions

The US labor market delivered a major surprise in July, with nonfarm payrolls falling by 23,000. This is far below the expected increase of 85,000 jobs. The weakness was not just limited to July, as downward revisions were made to previous months' employment growth. May's payroll growth was revised from 129,000 to 63,000, while June's was reduced from 57,000 to 20,000.

The combination of weak hiring and declining labor force participation paints a less reassuring picture than the lower unemployment rate alone would suggest. The unemployment rate did unexpectedly fall from 4.2% to 4.1%, but this came alongside another decline in labor force participation from 61.5% to 61.4%. Labor force participation has now fallen 0.7 percentage point since January, while employment-population ratio has declined 0.5 point over the same period.

Average hourly earnings growth slowed sharply from 0.3% to 0.1%, missing expectations of 0.3%. This adds evidence that labor-related inflation pressure is easing. Employment declined in local government education and retail trade, while health-care employment continued to trend higher.