RESOLVING THE LEDGER
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Job growth isn't expected to show much improvement in July, with payrolls and the unemployment rate likely holding relatively steady and economists looking through the headline numbers for further clues about labor market health.
Nonfarm payrolls are expected to post a gain of just 83,000, with the unemployment rate staying and unchanged at 4.2%. That would come off a slow June, which saw a gain of just 57,000 jobs.
Outside the headline numbers will come important indicators about the general strength in the job market — specifically, participation in the labor force, wage growth and the sectors that are driving the labor market now.
All that will paint an important picture for Federal Reserve officials, who lately have been expressing both a great deal of confidence in the labor market and worry enough about inflation to float the possibility of interest rate hikes sometime soon.
"The Federal Reserve's focus is squarely on inflation," wrote Heather Long, chief economist at Navy Federal Credit Union. "That's the right call, but it's important to keep an eye on whether this economy is creating enough opportunities for young Americans trying to establish a career path."
One eye-catching statistic from the June report was a dramatic swoon in workers who either had jobs or were actively looking. The labor force participation rate tumbled to 61.5%, its lowest since the March 2021 period when the economy was still recovering from the Covid shock. Outside of the pandemic era, it was the lowest participation rate since June 1976.
Of particular concern was a similar plunge in the so-called prime age participation rate — a cohort that includes workers between 25 and 54 years of age — to its lowest since December 2023 and the biggest monthly drop ever outside of April 2020, just after the pandemic declaration.
Economists will be looking to see if that trend was a statistical anomaly produced by seasonal and other distortions, or a more serious sign of deeper trouble in a labor economy marked by companies generally slow to hire as well as slow to fire.
"Although the hiring rate is low, the unemployment rate remains steady because layoffs are also low," Fed Governor Lisa Cook said Wednesday. "The low-hire, low-fire equilibrium hits some groups, including new entrants, especially hard and may restrain worker sentiment for good reason."
Cook added that while she is confident in the labor market, if inflation doesn't improve she will support a rate hike ahead , joining a growing chorus of central bankers looking at tightening monetary policy. Average hourly earnings are projected to rise 0.3% in July, and 3.5% from a year ago, a level that actually is considered consistent with the Fed's 2% inflation target.
Fed officials generally focus more on the unemployment rate than the gyrations in monthly payroll numbers. However, the jobless rate has remained low in large part because of the decline in labor force participation; the employment level in 2026 has actually fallen by 833,000.
For that reason, economists at Citigroup and elsewhere think the Fed's equation could change later this year. Citi has a well out-of-consensus call for three rate cuts between now and January 2027.
"While labor market data may still be described as 'stable' for now, we expect this to change in just a few months with the unemployment rate rising above 4.5%," Citi economists Veronica Clark said in a note. "This would shift focus back to the possibility of rate cuts, with cuts restarting in Q4 in our base case."
Vanguard economists say their 401(k) data points to a payroll gain of just 18,000 in July, pointing to a soft summer labor market that raises "the risk that this weakness will extend into autumn."
"Rising non-participation reflects lackluster hiring, which has been particularly challenging for younger workers," the asset manager wrote. "We expect much of this participation decline to reverse in coming months, creating upward pressure on the unemployment rate as these workers re-enter the labor force faster than they find jobs."
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