July payroll figures came in meaningfully lower than expected, posting a decline of 23,000 jobs, notably lowering the three-month moving average of job gains to just 20,000. Furthermore, the downward revision to the prior two months suggests that the labor market has been less robust than it originally seemed. Yet, with wage growth also remaining soft despite the recent energy shock, the offset to the weaker jobs picture is a Fed with less pressure to tighten policy next month.

• Total non-farm payrolls dropped by 23,000 in July, well below the expected gain of 80,000. Additionally, the prior two months of payroll data were revised lower, reducing job gains by 103,000 over the period. These revisions reinforce the slowdown in hiring momentum this month and suggest that the labor market has been softer than previously expected. Even so, it is worth noting that the three-month average payroll growth is still roughly consistent with the Fed’s estimate of breakeven employment, or the number of jobs needed to keep labor market conditions steady. 
• While the softer-than-expected reading appeared to disappoint in aggregate, beneath the surface, job growth in the month remained relatively broad-based, with 6 of the 11 major sectors adding jobs. Employment gains in Healthcare remained firm amid structural tailwinds related to an aging population. Construction also saw a rebound in job gains, likely supported by strong data-center spending. The Information sector, which remains at the forefront of AI-related displacement and has lost almost 11% of payrolls since its November 2022 peak, also bucked recent malaise and added jobs for the first time in four months. 
• On the other hand, job losses were concentrated in the Leisure & Hospitality and Retail sectors, which shed 59,000 jobs in the month. The ongoing weakness in these sectors stands in stark contrast to broad expectations that World Cup-related tourism would keep hiring demand firm through July. The Government sector was also a drag, losing 53,000 jobs, primarily from the local government education sector, which could reflect seasonal distortions around the timing of summer school. 
• The unemployment rate declined, surprisingly, to 4.1%, driven by a further drop in the labor force participation rate which now stands at 61.4%, down from a cycle high of 62.8%. Excluding the pandemic, the participation rate is now at the lowest level since the 1970s. Shrinking labor supply has been a function of both an aging population and the after-effect of the administration’s stricter immigration stance. Taken together, these forces reduce the breakeven level of payroll growth and explain why even tepid labor demand is sufficient in keeping the labor market modestly in balance. 
• Average hourly earnings decelerated in July compared to the prior month, seeing wages grow 3.2% from a year ago, the lowest level in five years. Indeed, despite the recent energy shock, wage pressures remain muted with the three-month annualized rate continuing to decline steadily, now at the lowest level since the pandemic. This dynamic, if it continues, should help keep broader inflation contained.