US Jobs Market Crumbles in July: Is US Employment Collapsing?

According to a research report released by Industrial Securities, the outlook for July's non-farm data further validates the downward trend in job market resilience. If inflation does not exceed expectations over the next two months, this data will provide a step forward for the Fed's rate cut in September. However, considering that there is still resilience in consumption and relatively low unemployment rates, an economic downturn is not currently the baseline scenario.

Industrial Securities' main points are as follows:

Why did May and June employment numbers drop sharply? Seasonal adjustments and new feedback. The Labor Department (BLS) explained the large downward revisions in May and June non-farm employment numbers as follows: one reason is that seasonal factors were re-calculated, and another reason is that some survey feedback was provided by companies and government agencies to the BLS. However, these reasons are part of the regular adjustment process and cannot fully explain the magnitude of the downward revisions.

(1) Regarding seasonal adjustments: The CES enterprise survey uses new seasonal factors to adjust recent data every month, which will also affect July's data on May and June. Additionally, July is a month with significant seasonality fluctuations, which may cause some disturbance in the data.

(2) Regarding new feedback from respondents: Because job survey questionnaires require time to collect responses, the BLS will revise previous values as more responses are received. After the pandemic, the response rate for new job surveys has been declining, indicating a decrease in accuracy. However, this year's average response rate is higher than last year's, and the 5-month response rate is not low. Therefore, the second point provided by the BLS may be more relevant to June's downward revisions.

Excluding government data, what is the true state of employment?

(1) Employment growth has become "stagnant" - almost entirely supported by education and healthcare sectors, while other industries have slowed down. Despite the large downward revisions in June's employment numbers and a lower base effect, July's new employment still remains weak. Among the 7.3 million people employed, education and healthcare accounted for 7.9 million, while other sectors saw negative growth: retail, finance, and professional services all experienced job losses.

(2) Long-term unemployment persists - demand contraction makes it harder for unemployed workers to regain employment, leading to an accumulation of long-term unemployed workers. Since 2025, the number of people receiving unemployment benefits has grown significantly, as have the numbers of those unemployed for more than 27 weeks. The impact of reduced demand and interest rate cuts on employment is expanding.

Why does employment growth remain weak, yet unemployment rates remain low? Supply-side factors that reduce labor supply also put downward pressure on unemployment rates.

Wages are still growing. July's private sector average hourly wage and year-over-year growth rate both rose from June. In the second quarter, the labor cost index grew by 0.9%. On one hand, the tight supply of workers puts a brake on wage growth; on the other hand, some service demand has recovered, driving up wages in industries such as retail, finance, and professional services.

Job data weakness increases the likelihood of rate cuts, while market concerns about economic resilience persist. The significant decline in employment and downward revisions in previous values, combined with a weak manufacturing PMI, have heightened concerns about economic resilience. After the data release, stocks fell, bonds rose, the dollar weakened, and gold prices rose, increasing expectations of two more rate cuts this year.

Looking ahead, this non-farm data further validates the downward trend in job market resilience. If inflation does not exceed expectations over the next two months, this data will provide a step forward for the Fed's September rate cut. However, considering that there is still resilience in consumption and relatively low unemployment rates, an economic downturn is not currently the baseline scenario.

Currently, interest rate expectations have already been largely fulfilled, and expectations of future rate cuts may fluctuate with new economic data. The current window for monetary easing may continue until the Fed releases new signals on its rate cut path at the upcoming August meeting or Jackson Hole conference.

Regarding the dollar, the Japanese central bank's cautious stance has constrained external shocks, and internal support from fiscal policy means that a large-scale decline in the dollar is less likely. Short-term fundamental factors suggest the dollar will remain under pressure due to interest rate risks and market concerns about economic resilience.

Risk warning: US inflation may exceed expectations, and the Fed's monetary policy may tighten more than expected.