Making sense of conflicting economic data can be tricky. Particularly when the data is fabricated by government bean counters. The task for the casual observer is to discern what is real and what is just statistical sleight of hand designed to obscure economic weakness.
If you quickly perused the July employment report published by the Bureau of Labor Statistics on August 7, you likely noted two contradictory data points. In July, the U.S. economy lost 23,000 jobs. Wall Street was expecting the addition of 83,000 jobs. Yet, at the same time, the official unemployment rate dropped from 4.2 percent to 4.1 percent.
How can an economy lose over twenty thousand jobs and end up with a lower percentage of unemployed workers? What gives?
Are discouraged workers simply dropping out of the labor pool, or is advanced number fudging happening behind closed doors?To better understand the July employment situation, we must look past the top line numbers. In addition to losing 23,000 jobs in July, the data fabricators at the BLS also reported substantial downward revisions for previous months.
May job gains were revised down by 66,000, from 129,000 to 63,000. June numbers were revised down by 37,000, from 57,000 to just 20,000. Combined, those two revisions erased 103,000 previously reported jobs. They simply vanished into thin air.
When you combine July job losses with those revisions, the picture becomes clearer. The strong payroll growth of recent years has faded. Over the three-month period from May through July, net payroll expansion averaged roughly 20,000 jobs per month. That is well below the 100,000 to 150,000 monthly additions required to absorb normal growth in the working age population.
Behind the Numbers
The main driver of the July decline was a massive contraction in local government education, which fell by 50,000 jobs. According to the World Socialist Web Site (WSWS):
“The start of the new municipal fiscal year on July 1, 2026, triggered immediate staff reductions across major urban school districts facing severe budget deficits following the expiration of federal pandemic relief funds. Chicago Public Schools issued formal layoff notices in July to over 160 central office staff while cutting hundreds of vacant school-level positions to address a $732 million budget shortfall. Similar municipal budget cuts took effect across major metropolitan districts in Pennsylvania, Ohio and Florida, where thousands of seasonal support staff, tutors and non-tenured classroom aides were officially non-renewed entering the summer.”
However, it wasn’t just school district jobs that were lost. Retail contracted by 19,000 jobs. Warehouses, supercenters, and fuel dealers cut payrolls as consumer spending cooled down. In addition, financial services lost 14,000 jobs.
So, with all these job losses shouldn’t the unemployment rate go up, not down? More directly, how does unemployment fall when jobs vanish?
The answer can be found in how the BLS measures the economy. The monthly report relies on two different surveys that measure two distinct things.
First, there’s the payroll survey. This survey asks roughly 119,000 businesses and government agencies how many workers are on their payroll. This is the source of the reported loss of 23,000 jobs in July.
Then there’s the household survey. This survey contacts about 60,000 households to ask individual adults whether they are working, looking for work, or out of the job market altogether. This is the source of the 4.1 percent unemployment rate.
Stalling Out
To be counted as officially unemployed in the household survey, a person must be out of work and actively seeking a job. If an unemployed person stops searching, decides to retire early, goes back to school, or decides they’d rather play video games than look for a job, they vanish from the official labor force calculation altogether.
When workers leave the labor force, the denominator in the unemployment equation shrinks. If the size of the active labor pool decreases faster than the number of employed people drops, the official unemployment rate goes down.
That is precisely what happened in July. The labor force participation rate slid to 61.4 percent. This is down 0.7 percent since January. Thus, thousands of workers have exited the active job seeking group altogether.
Of note, the household survey counts self-employed individuals, agricultural workers, and gig workers who are excluded from business payroll records. Slight shifts in independent work can offset some traditional business job cuts.
The point is, while the unemployment rate’s drop to 4.1 percent looks like good news on paper, it is the result of workers dropping out, not new job hiring. Taken as a whole, the July report paints a picture of an economy that’s stalling out.
So far, private businesses are not rushing to fire workers in mass corporate layoffs. Apart from government budget cuts and retail, corporate America is largely holding onto existing staff. But many businesses have paused new expansion. They are choosing not to replace departing staff.
Also note that average hourly earnings rose by just two cents in July to reach $37.62. Over the past twelve months, wage growth stands at 3.2 percent. While 3.2 percent wage growth is still better than pre-2020 averages, the rapid wage gains of the last few years that fueled high consumer spending have subsided.
Slowing income growth combined with elevated interest rates on credit cards, auto loans, and mortgages, is tightening the screws on household budgets.
No Good Choices
The Federal Reserve operates under a dual mandate from Congress. Maintain maximum employment and keep prices stable. While the job report illustrates part of the economic picture, consumer price inflation is also another critical factor. That’s why all eyes turned this week to the July Consumer Price Index (CPI) report, which was published by the BLS on Wednesday.
Adding to the ongoing pain at the cash register, the BLS reported that consumer prices rose 3.4 percent year-over-year in July, driven by persistent non-discretionary costs that continue to outpace the modest 3.2 percent wage growth.
While the monthly top-line numbers offered slight temporary relief, with overall energy dropping 1.5 percent and gasoline dipping 2.9 percent, the annual picture remains grim for household budgets. Over the last twelve months, the energy index has surged 14.7 percent, with gasoline prices up 24.6 percent and fuel oil skyrocketing 39.1 percent.
The next Federal Open Market Committee (FOMC) meeting isn’t until September 15 and 16. Hence, we’ll all have to endure a month of Fed navel-gazing. Will Fed Chair Kevin Warsh cut, hold, or hike rates next month?
With labor conditions rapidly softening and inflation holding stubborn at 3.4 percent, Chair Warsh and the FOMC face a classic stagflationary trap in September. Cut rates to support the crumbling job market, and you risk an increase in inflation expectations as double-digit annual energy costs filter through consumer prices. Raise rates, and you accelerate payroll contractions.
Given that labor supply shrinkage is masking true unemployment, the Fed will likely split the difference. Like a deer caught between the headlights, it will, once again, hold rates steady.
Regardless, the Fed’s next rate change will be a cut, not a hike. Monetary policy is political. Warsh will be compelled to cut rates in advance of the November 3, midterm elections. Moreover, Washington is dependent on further dollar debasement to help continue its debt shuffling games.
The debt market, however, doesn’t appear to be cooperating. Last we checked the yield on the 10-year Treasure note was about 4.7 percent. What’s more, the yield on the 30-year Treasury bond was over 5.2 percent.
Bond investors are demanding higher risk premiums, thus exacerbating Washington’s debt problem and putting the squeeze on Warsh.
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Sincerely,
MN Gordon
for Economic Prism
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