U.S. Economy Unexpectedly Lost 23,000 Jobs in July, Signaling a Weakening Labor Market

The U.S. economy shed jobs in July, losing 23,000 during the month, according to the Bureau of Labor Statistics’ latest report released Friday. Economists were expecting a gain of 83,000.

The BLS also revised the two prior months lower: May was cut from 129,000 jobs to 63,000, and June from 57,000 to 20,000, a combined 103,000 drop over two months. Average hiring over the past quarter now works out to about 20,000 a month.

A weakening job market

The losses were mostly clustered in a few industries. Local government education lost 50,000 jobs, retail trade lost 19,000, and financial activities lost 14,000.

On the flip side -- healthcare, which has generally looked to be the healthiest labor market for some time -- added 22,000 jobs in July.

While jobs were lost on net, the unemployment rate actually fell from 4.2% to 4.1%. This was due, however, to fewer people actively looking for work. Labor force participation -- the share of adults either working or looking for work -- slipped to 61.4%, down 0.8 percentage points from a year ago. The share of the population actually holding a job fell to 58.9%.

Inflation is still running hot

Normally, a weak job market would coincide with lower inflation, but that’s not the case. While the Consumer Price Index (CPI) fell 0.4% in June, inflation remains high, and most of the decline came from a drop in energy prices. Core CPI, which leaves out food and energy, was flat for the month.

The Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index, is currently running at 3.7%, well above the Fed’s target of 2%. And with the Iran war continuing to disrupt global oil flows, it’s possible inflation could tick up even higher.

What this means for the Fed's next move

The Fed left its benchmark rate at 3.50% to 3.75% in its last meeting, but the vote was 9-3, with the three dissenters all pushing for an increase in rates. Most investors were expecting at least one rate hike by the end of the year.

Today’s report changes things. The weak labor market may keep the Fed from raising rates to fight inflation for fear that it will make matters worse for workers. After the BLS released its findings, the implied odds of a September hike fell to roughly 44% from about 57%.

The bottom line

So what does this mean for investors? Generally, lower interest rates are good for the stock market. And indeed, the S&P 500 (SNPINDEX:^GSPC) ticked higher today. When interest rates tick up, money tends to flow out of equities and into bonds, and when they’re low, the reverse is true.

Of course, this is a simplified picture. The real world is much more complicated. If, for instance, the Fed holds off on raising rates when the market thinks that runaway inflation is a real risk, money will still flow to bonds. That’s a real possibility here.

We’ll know a lot more after Aug. 12 when the next CPI numbers drop, and again on Sept. 4 when we get the next round of jobs data. The best outcome, obviously, would be an improvement in both, followed by a clear move one way or the other. The worst outcome by far would be a sharp uptick in inflation with a sharp drop in the labor market.

Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.