US economy cools more than expected in July with 114,000 jobs added

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The U.S. labor market cooled more than expected in July, adding 114,000 jobs as the unemployment rate rose, prompting traders to ramp up bets on the Federal Reserve cutting interest rates this year.

The Bureau of Labor Statistics figure released Friday was well below economists’ expectations of 175,000 new jobs and the 179,000 jobs figure was revised down from the previous month.

The figure was also much lower than the average monthly gain of 215,000 over the previous 12 months. The unemployment rate rose to 4.3 percent, the fourth consecutive monthly increase.

Treasury yields and stock futures fell after the data was released.

Futures traders have sharply increased bets on a rate cut, pricing in a cut of more than one percentage point this year.

That was just over 0.75 percentage points ahead of the report. It also implies at least one half-point cut this year, with the Fed having just three more meetings before January.

However, Chairman Jay Powell said on Wednesday that a larger move “is not something we are thinking about right now.”

The yield on two-year Treasury notes, which move in line with interest rate expectations, fell 0.26 percentage point to 3.9%, its lowest since May 2023.

S&P 500 futures fell 1.7 percent.

The data came amid a sharp sell-off in stocks across Europe and Asia on Friday, driven by growing concerns about a US economic slowdown following dismal results from consumer and technology companies this week.

On Wednesday, the Fed kept borrowing costs at a 23-year high of 5.25 to 5.5 percent, but Powell said the bank could start cutting. price at the next meeting in September.

That meeting will be the last before the presidential election in November.

Inflationary have fallen significantly from their 2022 peak to the Fed’s 2 percent target, and officials want to avoid causing unnecessary harm to the economy by waiting too long to cut rates.

Powell said he doesn’t need to see evidence of a weakening labor market to feel confident that inflation is under control.

“I don’t think the labor market in its current state is likely to be a source of significant inflationary pressure,” he said on Wednesday. “So I don’t want to see material weakness in the labor market continue.”

The Fed’s goal is to create a so-called soft landing for the economy, in which inflation falls to its target without a sudden spike in job cuts. Such a scenario has proven difficult in the past, with attempts to cool an overheating economy often leading to recessions.

Fed officials believe they are on track to avoid that outcome, but Friday’s stock sell-off, fueled in part by weak manufacturing data, suggests markets are increasingly worried about the possibility of a recession.

“If they don’t cut rates, they risk creating a recession that they don’t want,” said Michael Gapen, head of US economics at Bank of America who previously worked at the Fed.

So far, companies have responded to higher interest rates by cutting jobs rather than laying off workers. According to data released this week, payrolls slowed in June, falling to about 8 million after peaking at just over 12 million in 2022.

Friday’s report showed jobs were added in health care, construction, transportation and warehousing. Hiring stagnated in sectors including manufacturing, retail and leisure and hospitality.

Average hourly earnings rose 0.2 percent for the month and have risen 3.6 percent over the past year.

The BLS said the storm that hit Texas at the beginning of the July jobs report collection process “had no significant impact” on the data.