US job growth slowed sharply in July, prompting a swift reaction from investors who are now betting the Federal Reserve could cut interest rates as early as September.
The Labor Department reported Friday that nonfarm payrolls rose by just 73,000 last month, well below economists' expectations of 104,000. Revisions also slashed job gains from May and June by a combined 258,000.
Analysts say the changes reveal deeper weakness in the labor market.
“The headline miss is bad enough. But the real story is the scale of the revisions,” said Nigel Green, CEO of financial advisory firm deVere Group. “The jobs market isn’t just slowing. It has been much weaker than anyone realized.”
Treasury yields fell and US stock futures declined after the data. Traders moved quickly to price in a 63% chance of a September rate cut, up from just 40% a day earlier, according to CME FedWatch data.
“The Fed is trying to keep the economy in balance. But it’s now clear that the labour market is out of step with expectations,” Green said. “This likely requires movement.”
The unemployment rate rose to 4.2% from 4.1%, while average hourly earnings increased 0.3% in July and 3.9% from a year ago. The wage growth points to some ongoing firmness in labor conditions.
Charlie Ripley, senior investment strategist at Allianz Investment Management, said the report suggests that the labor market continues to cool. “While the softer conditions don't warrant a warning signal for investors, it should put market participants including the Fed on notice that economic conditions are shifting,” he said.
Jeffrey Roach, chief economist at LPL Financial, said the downward revisions were “the most revealing” part of the report.
“Business demand for labor is slowing, adding uncertainty to the growth trajectory for the latter half of this year,” he said. “Given the weakness, investors will recalibrate rate expectations. This solidifies our view that the Fed could cut rates in September.”
Roach noted that job gains were mostly seen in healthcare and social assistance, while federal government employment continued to decline. He also pointed out that wage growth is still outpacing inflation, which gives consumers some ability to spend.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the report brings the Fed’s dual mandate into focus. “With this morning’s payroll miss and the downward revisions that came with it, the Fed will again need to balance a slowing job market with inflation which isn’t slowing fast enough,” he said.
Zaccarelli added that although the market may move past this report, the combination of weak jobs data and new tariff developments could make for a volatile trading day.
The Fed's next policy meeting is scheduled for mid-September. One more jobs report will be released before then, but Green believes the path is already clear. “The jobs market just gave the Fed a green light,” he said. “They’re likely to take it.”