3 bearish takes after the July NFP report

on Aug 6, 2023
  • The NFP report released last Friday is more bearish than bullish
  • July was the 6th consecutive month with negative revisions
  • Fed's fight against inflation is far from over as AHE rise again

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The Non-Farm Payrolls (NFP) report released last Friday was the highlight of the trading week. The US economy added 187k new jobs, and the unemployment rate dropped to 3.5% from 3.6%.

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Economists expected 205k new jobs for the month, so one may say the actual was close to the estimate. Coupled with the drop in the unemployment rate, the job market remains strong and the most resilient in history.

However, as always, the details matter more than the headline. The report highlights some concerning facts about the job market in areas such as:

  • Concentration of jobs
  • Negative revisions
  • Average hourly earnings

Most jobs are in government, education, and healthcare sectors

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The first thing to worry about is the concentration of jobs in just a few sectors. Details show that 60% of the newly created jobs are just in three sectors – government, education, and healthcare.

With so many jobs concentrated in just a few sectors, the data is misleading, to say the least. It shows vulnerabilities in the other economic sectors and might be just the first signal that the job market is not as strong as it looks.

July was the 6th consecutive month with negative revisions

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Trading the NFP report is never easy. One of the reasons why the price action is chaotic comes from other variables that need to be accounted for besides the actual jobs created or lost in a month.

Revisions are often more relevant than the actual NFP number.

In July, the US Bureau of Labor Statistics announced it had revised the June NFP number to 185k from 209k. This is the 6th consecutive negative revision, and if one looks at the cumulative payroll gains with revisions, the outcome is 13% lower than first reported.

Wages keep rising

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Finally, the average hourly earnings in July rose beyond what economists expected. More precisely, the monthly increase was 0.4% vs. 0.3% expected.

It indicates that the fight against inflation is far from over. Thus, the Fed will have no incentive to cut rates this year. So financial conditions will tighten even more, given the ongoing quantitative tightening program (i.e., balance sheet reduction).


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