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July jobs report: Not a game-changer

August 4, 2023 | 2 min read
Seema Shah
Chief Global Strategist
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The July jobs report had something for both doves and hawks. Non-farm payrolls rose by 187,000, the first sub-200k number since December 2020, but hourly earnings growth came in a little hotter than expected. This mixed labor market picture will not sway the Federal Reserve (Fed) in one direction or the other.

Report details

  • Total non-farm payrolls rose 187,000 in July, slightly below consensus expectations for a 200,000 gain. While this was the second consecutive downside surprise and the first sub-200,000 number since the pandemic, it’s also worth noting that, pre-pandemic, a number above 175,000 would have been considered consistent with a strong economy.
  • Some analysts are focusing on the negative revisions, which subtracted 49,000 payrolls over the previous two months. While this slightly adds to the picture of a softening jobs market, it’s hardly a meaningful revision and certainly not a game-changer.
  • Hours worked declined again, an additional tentative sign of softening. In previous downturns, a drop in workers’ hours preceded larger-scale layoffs.
  • Manufacturing lost 2,000 jobs in July, a significant downside surprise to expectations for an increase of 5,000. Health care accounted for around one-third of jobs added, while private education, construction, and leisure & hospitality also showed strong gains.
  • The unemployment rate dropped from 3.6% to 3.5% as employment in the household survey rose by 268,000, while the participation rate remained unchanged at 62.6% for the fifth consecutive month.
  • Hawks will have been inspired by the fact that average hourly earnings rose by 0.4% on the month, slightly higher than expected. The annual average hourly earnings growth remained unchanged at 4.4%, higher than the 4.2% consensus forecast. Continued wage pressures imply that the Fed cannot rest easy just yet.

Non-farm payrolls and average hourly earnings
2022–present

Line graph of non-farm payrolls and average hourly earnings from 2022-August, 4, 2023

Source: Bureau of Labor Statistics, Bloomberg, Principal Asset Management. Data as of August 4, 2023.

Today’s jobs report offers a slightly confusing picture of softening jobs growth but still-hot wage growth. The Fed may still have work to do, but there is no solid reason to rush into hike rates again.

There is still one more jobs report and two CPI reports before the FOMC’s next meeting. If no clear direction emerges, the Fed is likely to stay put. Indeed, Fed Chair Jerome Powell appears to need a very compelling reason to hike again, so it would likely take a meaningful upside surprise to both job gains and wage growth to prompt Fed action in September.

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