Employment hit a wall in July: Sahm Rule breached

We expect double the number of rate cuts compared to just a month ago.

Payroll employment slowed to a rise of 114,000 in July after increasing a downwardly revised 179,000 in June. The public sector missed expectations with only 17,000 jobs added in July, mostly at the state and local levels. Public sector compensation accelerated during the second quarter, while private sector gains decelerated. That reflects a catch-up in union contracts which have been renegotiated and lagged the surge in wages during the peak of the hiring frenzy in 2022.  

Those shifts, coupled with a slowdown in hiring in the private sector, have enabled state and local governments to finally compete and fill positions they couldn’t earlier in the recovery. Federal hiring remained suppressed.

Private sector payrolls rose by 97,000. The strongest service sector gains remained in healthcare and social services, and leisure and hospitality. Those two sectors alone added 80,000 jobs and accounted for more than 80% of total job gains and offset losses elsewhere in the service sector. 

Construction added 25,000 jobs, mostly in specialty trade contractors. Most of those gains were in commercial real estate, but we did see a rise of 7,000 in residential construction. The transportation and warehousing industry moved further out of its recession and added 14,000 jobs. The gains were concentrated in couriers, messengers, warehousing and storage. That is not surprising, given the surge in inventories we have seen as producers pushed to accumulate goods in their warehouses ahead of tariffs and the threat of port strikes later this summer. Trucking remained weak. 

Losses in employment were concentrated in the information sector, which shed 20,000 jobs. The entertainment industry has not really recovered since the writers and actors strike last year. 

Average hourly earnings rose 0.2% in July, which translates to a 3.6% increase from a year ago. That is the weakest annual increase in wages since May 2021. The slowdown in wage gains was greatest in retail trade and mining and logging. Hours worked fell again to the lowest since January 2024. That dealt a blow to weekly earnings and was likely exacerbated by the disruptions due to Hurricane Beryl. 

The report said that the hurricane had little effect on the data. However, a record-breaking 461,000 workers reported that they could not work due to bad weather in July. That is the largest disruption due to bad weather in July on record. More than a million lost power in the Houston area in the wake of flooding and a blistering heatwave.

There is no way to make the July employment report look good.

Sahm Rule breached

Separately, the unemployment rate jumped to 4.3%, its highest since October 2021. That easily breached the Sahm Rule, an early recession indicator. Much of the surge in unemployment was in the ranks of those with a high school degree or less, or those who can afford it least. The ranks of those forced to accept part-time work for economic reasons surged by 346,000, the largest increase since June 2023. The number of those working part-time due to economic reasons reached the highest level since June 2021, when we were still emerging from the pandemic. That is very worrisome. 

The participation rate edged up slightly to 62.7%. The increase was larger for women than men, but both saw increases. Household employment, which has been running significantly weaker than the establishment survey, increased by only 67,000, almost half the pace of June. 

The number of those out on parental leave was the second highest in July on record. Millennials are having families but frustrated that they can’t afford to buy homes. A recent CNN poll revealed that over 80% of renters want to buy but can’t afford to. Escalating homeowners’ insurance and home maintenance costs have added to the hurdles associated with high mortgage rates and the surge in home values.

The household survey shows that employment has essentially flatlined with a gain of only 57,000 over the last year. That contrasts with an increase of 2.5 million jobs in the establishment survey. The two surveys tend to converge over time. This is the largest divergence on record. One of the problems that the Federal Reserve is struggling with is that the household survey lags the establishment survey due to its reliance on population estimates. 

Government demographers have been unable to keep up with the influx of immigrants since the end of the pandemic; we are at least two years behind. The establishment survey can capture more survey respondents upon monthly revisions, which has left the Fed relying on that survey more than the household survey. This summer will be a major test over whether that was the right call for the Fed to make.

Bottom Line

There is no way to make the July employment report look good. The Fed is likely feeling remorse over its decision to hold rates unchanged at its July meeting earlier this week. It now must cut more aggressively when it meets in September, before the window for a softish landing closes entirely. Chairman Jay Powell’s Jackson Hole Symposium keynote later this month will signal just how far the Fed is willing to cut. We now expect a half percent cut in rates in September and another half percent by year-end. That is double what we expected just a month ago.