Payden & Rygel: US nonfarm payroll stats. What gives?
After six months of solid recovery, the change in nonfarm payroll employment dipped negative in July, with over 100k downward revisions to previous months. Despite the negative headline, though, the unemployment rate dropped to 4.1%. What gives?
The U.S. economy lost 23k jobs in July. Worse, the previous two months of job growth were revised down by 102k, so the three-month moving average of overall payrolls is now just 20k. The household survey also suggested that the economy lost 87k jobs in July. Excluding the volatility created by the public sector, private payrolls grew at 40k per month in the last three months, also only half of the pace from earlier in the year.
Within sectors, the story is more mixed. The slowdown in private job growth is led by a sharp contraction in the leisure and hospitality sector of 40k in July, while trade and financial services also contracted. Healthcare and education sectors, the sole driver of job growth for much of 2025, also slowed in July. However, on the positive side, all other private sectors added jobs in July.
At the same time, the labor force participation rate dipped to 61.4%, the lowest since March 2021. The fall in the participation rate was concentrated at the ends of the age spectrum: both workers under the age of 24 and those above the age of 45 saw a reduction in participation. As a result, the labor force shrank by over 200k in July, pulling the unemployment rate lower to 4.1%.
On the more positive side, average hourly earnings cooled in July, with the year-over-year increase now moderating to 3.2% from 3.7% at the start of the year. We’d caution against reading too much into the measure since average hourly earnings can be skewed by volatility in sector-level employment.
Overall, we’d summarize the labor market like this: layoffs are low, but so is hiring activity. If you are unlucky enough to lose your job, it’s more difficult to get hired. However, on a 3-month average basis, we are seeing just enough net job gains to keep the unemployment low. It’s a fragile equilibrium, but certainly not a good or hot labor market.
For the Fed, we still think there is a hiking bias built in, not because the labor market is overheating, but because the central bank has missed its inflation target for 5 years running. A negative NFP print might delay the timing of rate hikes.
Today’s report likely won’t stop the hawkish members who are already seeking rate hikes at the July meeting, but for those in the middle who agreed on staying on hold but were becoming increasingly impatient with above-target inflation, weak job growth could provide a reason to wait just a little longer, lowering the likelihood of a September hike.
That said, we still have one more job report, two more CPI prints, and one more PCE inflation print ahead of the September meeting. If inflation prints come back above 0.3% month-over-month, and the August or September reports bounce back from weak summer hiring trends, rate hikes will be right back on the table.