INDUSTRIAL SECURITIES July U.S. Non-Farm Payroll Review: Has U.S. Employment Collapsed?

According to the Zhitong Finance APP, Industrial Securities released a research report stating that the July non-farm data further verifies the trend of declining resilience in the labor market. If inflation does not exceed expectations in the next two months, such data provides a stepping stone for the Federal Reserve to cut interest rates in September. However, considering the still resilient consumption and relatively low unemployment rate, an economic recession is not the current baseline scenario. The expectation for interest rate cuts this year is already almost fully priced in, and the expectations for rate cuts before the September meeting may fluctuate with new economic data.

The main points from Industrial Securities are as follows:

Why were the employment numbers for May and June significantly revised down? Seasonal adjustments and new responses. The non-farm employment numbers for May and June were revised down by 125,000 to 19,000 and 133,000 to 14,000, respectively, with the magnitude of the revisions being close to the highest since the pandemic. The Bureau of Labor Statistics (BLS) provides two explanations for the significant downward revisions: first, the recalculation of seasonal adjustment factors; second, feedback from surveyed companies and governments that provided new information to the BLS. However, these reasons fall within the realm of routine adjustments and cannot fully explain the magnitude of the revisions.

(1) Regarding seasonal adjustments: The CES survey, which counts new non-farm employment, uses new seasonal factors each month to adjust the data from the last three months, so the July data will also affect the data for May and June (while the CPS household survey, which surveys unemployment rates, only adjusts the latest data using seasonal factors). Additionally, July is a month with significant seasonal fluctuations, and seasonal adjustments may have distorted the readings. It should also be noted that the "annual benchmark revision" of employment data, which occurs twice a year, will be announced on September 9 and did not affect this non-farm data.

(2) Regarding new feedback from respondents: Since it takes time to collect responses to the employment survey questionnaires, as more questionnaires are collected, the BLS will revise previous values. After the pandemic, the response rate for new employment surveys has decreased, indicating a decline in survey accuracy, which has led to frequent revisions of past data in recent years. However, the average response rate from January to May this year was higher than last year, and the response rate in May was not low, so the second reason provided by the statistical bureau may be more targeted at the downward revision of June data, which needs to be confirmed in the next non-farm report. By industry, the government sector had the largest revision, with an average downward revision of 60,000 jobs for May and June, followed by retail, professional services, and other service industries.

Beyond the revision disturbances, how weak is employment?

(1) Employment growth resilience is "shrinking"—almost solely supported by the education and healthcare sectors, while other sectors are mostly cooling down. With the significant downward revision of employment numbers in June and a lower base, new employment in July remains sparse. Among the 73,000 new jobs, the education and healthcare sector added 79,000 jobs, while other sectors collectively experienced negative growth: retail and finance saw a recovery in employment, adding 16,000 and 15,000 jobs in July, respectively; leisure, hospitality, and professional services experienced significant downward revisions, with weak employment in July; manufacturing employment decreased by 11,000, corresponding to the manufacturing PMI employment component; government employment decreased by 10,000, with the federal government being the main drag, consistent with our comments in the June non-farm review Excluding the government, the private sector added 83,000 jobs, stronger than in June, but the central tendency remains a downward trend. In the past three months, the average non-farm employment increase was 35,000, while the average non-farm employment increase in the private sector, excluding the government, was 52,000, which is weaker compared to the pre-epidemic central tendency of 178,000.

(2) Extended duration of unemployment - demand contraction makes it harder for the unemployed to return to work, leading to an accumulation of long-term unemployed. Since 2025, the number of people continuing to claim unemployment benefits and those unemployed for more than 27 weeks has significantly increased, and the impact of stagnant interest rate cuts and cooling demand on employment is expanding.

Weak employment growth, why does the unemployment rate remain low? Reduced supply exerts downward pressure on the unemployment rate. The employment figures used to calculate the unemployment rate and the "new non-farm employment figures" come from two different survey sources: households and businesses.

Although this discrepancy in survey sources has caused a widening gap in employment figures this year, both are weak in this data. In fact, the decline in labor participation rate due to reduced immigration has exerted downward pressure on the unemployment rate, while the employment figures used to calculate the unemployment rate are showing negative growth, reflecting the consistency of both surveys in the trend of weakening employment. The U.S. labor market has a rigid gap post-epidemic, and Trump's hawkish immigration policy has exacerbated the supply shortage: the immigrant labor population has declined for four consecutive months, and the labor participation rate has once again entered a downward channel. In the context of both labor supply and demand cooling, the turning point for the unemployment rate to accelerate upward has been repeatedly postponed, providing support for the Federal Reserve's monetary policy stability in the first half of the year.

Wage growth remains resilient. In July, the average hourly wage in the private sector increased both year-on-year and month-on-month compared to June; the labor cost index grew by 0.9% quarter-on-quarter in the second quarter. On one hand, the tight supply creates resistance to the decline in wage growth, and attention should be paid to its support for core service inflation; on the other hand, the recent marginal recovery in some service demands has also driven wage increases, with growth in retail and financial employment, and an increase in job vacancies in information and professional services, leading to higher wage growth in these sectors.

Weak employment data increases the feasibility of interest rate cuts, and the sustainability of easing trades depends on the Fed's subsequent expectations guidance. Significantly worse-than-expected employment, sharply revised previous values, and weakening manufacturing PMI have intensified market concerns about economic resilience, leading to increased risk aversion. After the data release, stocks fell, bonds rose, the dollar weakened, gold prices increased, and expectations for interest rate cuts rose to 2.7 times within the year.

Looking ahead, this non-farm data further verifies the trend of declining resilience in the labor market. If inflation does not exceed expectations in the next two months, such data would provide a stepping stone for the Fed to cut rates in September. However, considering the still resilient consumption and relatively low unemployment rate, an economic recession is not the current baseline scenario.

Current expectations for interest rate cuts this year are almost fully priced in, and expectations may fluctuate with new economic data changes before the September meeting. The current easing trading window may extend until the Fed releases new expectations management signals regarding the interest rate cut path, such as the upcoming Jackson Hole meeting in August.

For the dollar, the current hesitant stance of the Bank of Japan restrains external shocks, and subsequent fiscal support provides internal backing. Therefore, the probability of a significant weakening similar to last year is low, but short-term fundamentals continue to decline, and risks in U.S. Treasury supply and demand still suppress dollar credit, making it difficult for the dollar to strengthen Recently, Trump has frequently attacked Powell, demanded the dismissal of Labor Statistics Bureau Director Erica, and called for the resignation of Federal Reserve Board member Kuger, focusing on the impact of these events on market risk appetite.

Risk Warning: U.S. inflation continues to exceed expectations, and the Federal Reserve's monetary policy tightening exceeds expectations