soft US jobs report raises new questions

Economists and analysts have been combing over data releases as of late in search of indications on the direction of the economy. Despite ongoing headwinds from elevated interest rates and an uncertain and wide-ranging trade dispute, the markets have seemed surprisingly little bothered.

That changed recently, as a set of downward revisions to job growth has raised new doubts about the health of the labor market. The latest jobs report showed that the economy added just 74,000 jobs in July, the weakest initial result since last October, along with some of the sharpest downward revisions in years.

At first reporting, both May and June showed solid growth at 144,000 and 147,000 jobs added, respectively. But after revisions, those same figures now stand at 19,000 and 14,000, a drop of nearly 90%. 

On average, job growth for the second quarter has now been revised down by 92,000 per month. The changes to May and June were especially striking, as not only were they unusually large, but they came two days after the Federal Reserve cited strong job growth as a reason to hold rates at their latest meeting. 

Treasury yields fell on the news, with the 10-year at its lowest level in months, a sign that investors expect slower growth ahead. Because 30-year fixed mortgage rates tend to follow the 10-year yield, it likewise fell to 6.72%, the lowest level so far this year. Markets now see the odds of a cut in September at better than 90 percent, up from a coin toss just weeks ago, according to the CME FedWatch tool.

Whether the Fed moves to cut more beyond September will depend largely on how the labor market further evolves. For now, hiring has slowed, but the unemployment rate has held steady. That is in large part because the labor force itself is expanding more slowly due to tighter immigration policies from the federal government. If job growth continues to lag without a significant rise in unemployment, the Fed’s attention may shift back to its other mandate: ensuring price stability.

For now, the recent jobs report marks a clear break from the steady stream of resilient data we’ve seen in recent months, and may be the first real signal that the long-anticipated slowdown is finally taking hold.