The U.S. labor market looks much weaker than previously thought, and Wall Street now expects the Federal Reserve to resume rate cuts sooner rather than later.
The Labor Department reported Friday that payrolls grew by just 73,000 last month, well below forecasts for about 100,000.
But downward revisions for prior months shocked investors even more, revealing that the labor market came to a near standstill over the spring. May’s tally was cut from 144,000 to 19,000, and June’s total was slashed from 147,000 to just 14,000, resulting in a combined cut of 258,000. The average gain over the past three months is now only 35,000.
The massive revisions prompted President Donald Trump to fire the head of the federal agency that puts out the payroll data, Erika McEntarfer, commissioner of the Bureau of Labor Statistics. The data reprint was so bad that Eric Pachman, chief analytics officer at Bancreek Capital Advisors, noted that while July’s 73,000 looks comparatively like good news, “how can we even trust this number now?”
The jobs report came just days after the Fed kept rates steady again, with Chair Jerome Powell signaling a continued desire to wait for more data to see how President Donald Trump’s tariffs would impact inflation, which is still running above the central bank’s 2% target.
“Powell is going to regret holding rates steady this week,” Jamie Cox, managing partner at Harris Financial Group, said in a note. “September is a lock for a rate cut, and it might even be a 50-basis-point move to make up the lost time.”
The unemployment rate also edged up to 4.2% from 4.1%, even as the labor force shrank. Meanwhile, U.S. factories continued to slump and cut 11,000 jobs last month after shedding 15,000 in June and 11,000 in May amid uncertainty over Trump’s trade war.
Stocks plummeted on the jobs data, with the S&P 500 down 1.6% and the Nasdaq down 2.2%. The 10-year Treasury yield sank more than 15 basis points to 4.208% as Wall Street priced in a rate cut at the Fed’s meeting next month and more later in the year. The yield on the two-year Treasury, which is more sensitive to Fed rates, plunged almost 27 basis points.
Markets were slumping before the jobs data as Trump announced fresh tariff rates on U.S. trading partners, with some higher than before, as well as an additional 40% duty for all transshipped goods.
After the jobs report, Trump reiterated his monthslong demand for the Fed to lower rates, while Cleveland Fed President Beth Hammack stood by the central bank’s decision on Wednesday to keep policy steady.
Still, Wall Street noted that the revisions put the labor market in a starkly different light, after it looked remarkably resilient since Trump launched his trade war.
“Headline NFP [nonfarm payroll] at 73K is a miss, but perhaps more concerning is –258K net revisions to the prior two months. These revisions put May’s headline NFP at 19K and June’s at 14K,” Adam Hetts, global head of multi-asset and portfolio manager at Janus Henderson Investors, said in a note. “Had those figures been the initial prints a month or two ago it would have significantly changed the labor market narrative over the entire summer. Indeed, odds of a September rate cut are increasing significantly on the back of this data release.”
Labor supply vs. demand
Other analysts noted that other details don’t suggest there’s a total collapse in employment. The unemployment rate hasn’t changed much for a while. Wages are still growing at a healthy clip, putting more money in consumers’ wallets.
Meanwhile, weekly job claims data has been steady overall, too, meaning there hasn’t been a widespread surge in layoffs.
A critical question is whether the muted job gains are the result of slow labor supply or slow demand. Supply has taken a big hit since Trump launched his immigration crackdown, and Friday’s payroll report showed that the number of foreign-born workers in the labor force has shrunk by 1.2 million in the past six months.
As a result, even a tepid uptick in hiring will barely move the needle on the jobless rate. In fact, Powell suggested on Wednesday that the unemployment rate merits closer attention than the payroll number since less demand is needed to offset supply.
Whether supply or demand is the culprit has major implications for the Fed, according to Preston Caldwell, chief U.S. economist at Morningstar.
“The Fed has no reason to loosen monetary policy in response to a decline in job growth driven by labor supply—as such a decline is neither deflationary nor does it create a gap with respect to maximum sustainable employment,” he wrote in a note. “On the other hand, the speed of the deceleration in job growth, along with uncertainty about what exactly the data means, should be alarming to the Fed, and argues strongly for a September cut as a prophylactic measure at the least.”
But Bill Adams, chief economist for Comerica Bank, noted that Trump’s tariffs are still putting upward pressure on inflation, making it less clear-cut that the Fed will ease policy soon.
He also pointed to labor supply, specifically that the overall labor force has fallen for three consecutive months. Fed policymakers will see another jobs report before their September meeting.
“If it shows labor supply declined again and held the unemployment rate steady while tariffs push up inflation, the Fed is likely to hold interest rates steady again,” Adams wrote in a note.
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