Labour market weakness could re-balance Fed concerns

US nonfarm payrolls fell by 23K in July (+80K), while there were downward revisions to previous months, which left the 3-month average gain in employment at just +20K. The household employment data, which is the same dataset that yields the unemployment numbers, were even weaker. Nevertheless, the unemployment rate actually fell in July (4.1% from 4.2%). This reflects an ongoing fall in the labour force participation rate (61.4% from 61.5%), which reached the lowest level since the 1970s, once excluding the pandemic period. Declining participation, although reflecting some structural elements, is usually an indicator of cyclical labour market weakness. The data support our view that some of the strength in payrolls in the last few months was flattered by transitory factors. Given the previous robustness in the labour market data, the Fed’s concerns have been fully concentrated on elevated inflation. Today’s report could re-balance those concerns to the labour market side of its dual mandate. We maintain the view that the Fed will remain on hold over the next few months, though high inflation still means that the risks are skewed towards a hike.