Head scratcher

The narrative that US labor market strength would be another inflationary force took a hit last week when the Bureau of Labor Statistics reported a net decline of 23,000 jobs in July. This was much worse than the forecasted 80,000 increase. Alternative data from payroll company ADP showed a similar cooling trend in hiring. But layoffs appear equally as low, supporting the view that the low-hire, low-fire environment is generally intact.

The jobs report, along with the negative revisions to prior months, raised some eyebrows as recent trends had been moving in the opposite direction and strong corporate earnings would typically support hiring. Seasonal factors may be partly to blame. It will take some time to determine if this is the start of a trend or a “one off.” 

One positive would seem to be the decrease in the unemployment rate to 4.1%, its lowest reading in 2026. But this likely is due in large part to a lower labor force participation rate. The key question is whether this type of labor environment supports Federal Reserve rate action in either direction. In any event, the bond market will keep this report front of mind as it digests the next key data point: Wednesday’s Consumer Price Index, a critical gauge of inflation.

The negative job growth is an outlier among data that has indicated the US economy is healthy. Last week’s ISM manufacturing index reached its highest level since May 2022. Strength in new orders, production and employment components were all in expansion territory.