EB SECURITIES: Why was the U.S. non-farm payroll significantly revised down?

According to the Zhitong Finance APP, Everbright Securities released a research report indicating that the non-farm payroll data for May and June has been revised down by a total of 258,000. The employment increase in July was 73,000, significantly lower than the average monthly increase of over 100,000 in the first quarter, while the unemployment rate also rose to 4.2%, indicating a growing weakness in U.S. non-farm employment. The probability of the Federal Reserve restarting interest rate cuts in the second half of the year is relatively high. The CME Fedwatch tool shows that the market expects the Federal Reserve to cut interest rates three times throughout 2025, with the first cut expected in September, having a probability of over 80%, followed by consecutive cuts in October and December, with probabilities of 66.0% and 51.4%, respectively.

The main viewpoints of Everbright Securities are as follows:

Event: On August 1, 2025, the U.S. Department of Labor announced the non-farm payroll data for July 2025: an increase of 73,000 non-farm jobs, with an expectation of 110,000, and the previous value revised from 147,000 to 14,000; the unemployment rate for July was 4.2%, in line with expectations, and the previous value was 4.1%; average hourly wages increased by 3.9% year-on-year, with an expectation of a 3.8% increase, and the previous value revised from a 3.7% increase to a 3.8% increase.

How to view the significant downward revision of June's non-farm data?

On one hand, the monthly adjustment of non-farm data is a routine practice, with the significant downward revision in June mainly affecting government, leisure and hospitality, and construction employment data, which together accounted for a downward revision of 90,000, nearly 70% of the total revision for June's non-farm data. Historically, these industries have had high prediction errors and are prone to significant fluctuations. On the other hand, the substantial downward revision of this non-farm data reflects the considerable disruption caused by tariffs to the U.S. economy, which can lead to a decline in the predictive accuracy of the "birth-death model," widening the gap between actual values and initial values predicted by the model.

The significant downward revision of June's non-farm data reflects the considerable disruption caused by tariffs to the U.S. economy, aligning with the ongoing viewpoint that the resilience of the U.S. economy should not be overly estimated, and the direction of interest rate cuts remains very certain. Objectively, the cumulative downward revision of 258,000 in the non-farm data for May and June, along with the 73,000 new jobs in July, which is significantly lower than the average monthly increase of over 100,000 in the first quarter, and the rise in the unemployment rate to 4.2%, all point to a growing weakness in U.S. non-farm employment, with a high probability of the Federal Reserve restarting interest rate cuts in the second half of the year.

New non-farm employment below expectations, stable performance in financial activities, education and healthcare, and retail industries

(1) Financial activities, education and healthcare, and retail industries: In July, financial activities, education and healthcare, and retail industries added jobs of +15,000, +79,000, and +16,000, respectively, higher than the previous values of -2,000, +52,000, and -14,000, indicating relatively stable demand in the service sector. (2) Manufacturing: The goods-producing sector has seen negative job growth for three consecutive months, reflecting insufficient willingness of enterprises to invest in production.

Labor participation rate declines, unemployment rate rises

In July 2025, the labor participation rate recorded at 62.2%, down from the previous value of 62.3%, with a significant weakening of employment willingness among the middle-aged and young population. In terms of the unemployed population, the number of unemployed increased by 221,000 in July, driving the U3 unemployment rate (= number of unemployed / labor force) up to 4.2% From a structural perspective, the number of temporary unemployed in July increased by 80,000 (previously decreased by 14,000), the number of permanent unemployed remained unchanged at 0 (previously decreased by 29,000), and the number of those completing temporary work increased by 31,000 (previously decreased by 122,000), indicating that companies are beginning to increase layoffs.

The non-farm payroll data for June has been significantly revised down, reflecting that tariffs have caused considerable disruption to the U.S. economy, and the direction of interest rate cuts remains very certain.

Objectively, the non-farm payroll data for May and June has been cumulatively revised down by 258,000, and the 73,000 new jobs added in July is a significant drop compared to the average monthly increase of over 100,000 in the first quarter. At the same time, the unemployment rate has risen to 4.2%, indicating that the weakness in U.S. non-farm employment is becoming more apparent, and the probability of the Federal Reserve restarting interest rate cuts in the second half of the year is relatively high. The CME Fedwatch tool shows that the market expects the Federal Reserve to cut interest rates three times throughout 2025, with the first cut expected in September, having a probability of over 80%, followed by consecutive cuts in October and December, with probabilities of 66.0% and 51.4%, respectively.

Risk Warning: U.S. economic downturn exceeds expectations; trade and geopolitical situations evolve beyond expectations