The U.S. economy created fewer jobs than expected while the unemployment rate increased, signaling that the labor market could be going through a rapid deceleration at a time when the Federal Reserve could soon be cutting interest rates.

According to the Bureau of Labor Statistics (BLS), there were 114,000 new jobs in July, down from 179,000 in June. This fell short of the consensus estimate of 175,000.

The unemployment rate rose to 4.3 percent, up from 4.1 percent, and higher than economists’ expectations of 4.1 percent. This represents the highest jobless rate since October 2021. Average hourly earnings eased to a smaller-than-expected pace of 3.6 percent year-over-year. On a monthly basis, average hourly earnings edged up 0.2 percent.

The labor force participation rate inched higher to 62.7 percent, from 62.6 percent. Average weekly hours slipped to 34.2, from 34.3.

Health care accounted for much of the jobs, with 55,000 new positions added last month. This was followed by construction (25,000) and government (17,000). Additionally, the household portion of the monthly jobs report, which removes duplication, showed the economy created 67,000 new jobs.

The number of people working two or more jobs surged to 8.473 million, up from 8.34 million. Full-time workers advanced by 448,000, while part-time workers declined by 325,000.

The divergence between U.S.-born and foreign-born workers widened compared to a year ago. U.S.-born workers tumbled by more than 1.2 million from July 2023. By comparison, foreign-born workers increased by roughly 1.3 million.

Market Reaction

The U.S. financial markets extended their losses in pre-market trading following the employment data, with the leading benchmark indexes down as much as 2 percent.

U.S. Treasury yields were red across the board, with the benchmark 10-year yield plummeting below 3.82 percent. The 2-year yield fell below 4 percent, while the 30-year bond tumbled to 4.16 percent. The U.S. Dollar Index (DXY), a gauge of the greenback against a basket of currencies, tanked below 104.00.

Markets now received confirmation that the job market is “rolling over” after a miss in payroll growth and the jump in the unemployment rate, said Byron Anderson, the head of fixed income at Laffer Tengler Investments.

“The Fed narrative of data-dependent should be done moving forward, especially if the labor data continues to fall before the next Fed meeting,” Anderson said in a email to media outlets. “The Fed will need to go into economic protection mode moving forward to calm markets. We should see rate cuts shortly and the bond market is asymmetrically positioned lower for the short term.”

While investors are penciling in a rate cut at the September policy meeting, traders are discussing the size of the Federal Reserve’s initial pivot.

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