A weaker-than-expected jobs report for July is likely to strengthen the case for those who support holding interest rates steady and could renew Federal Reserve policymakers' focus on the strength of the job market if payrolls continue to soften.
But, short of a weakening trend, officials are still likely to keep their focus on inflation.
Payrolls for the month of July contracted by 23,000, compared with expectations for a gain of 80,000. The number of jobs initially reported in May and June was revised down by a combined 103,000. T
The unemployment rate ticked down to 4.1% from 4.2% in June, as people's participation in the labor force dropped. Since January, the labor force participation rate has declined by 0.7%.
Job declines were led by local government education, which dropped by 50,000, retail, which shed nearly 20,000 jobs, and the financial sector, which lost 14,000 jobs. Healthcare added 22,000 jobs.
"Although the hiring weakness in the July employment report has not been reflected in the broader set of labor market indicators, it is still likely to revive concerns among Fed officials about the health of the labour market and make them less inclined to commit to near-term tightening," said Thomas Ryan, senior economist for Capital Economics.
"Overall, it's going to take a meaningful upside surprise in the price data next week for the Fed to hike interest rates as soon as September."
Earlier this week, Fed Governor Lisa Cook, who favored holding rates steady at the Fed's July meeting, said if she does not see signs of inflation coming down soon, she is prepared to act. She added the caveat that she would consider how raising rates would impact stability in the job market.
"I would support an increase if it becomes necessary to bring inflation down. It may not," she said. "Some disinflationary forces are already in play, which could push inflation toward our target without a rate increase."
At the start of the year, when job growth was similarly erratic, some Fed officials reasoned that zero job growth could still mean a balanced job market. San Francisco Fed president Mary Daly noted at the time that changes in government policies that led to a decline in immigration, pushing workforce growth toward zero, meant traditional "rules of thumb" for labor market health were changing.
Fed governor Chris Waller also said early this year that there could be zero job growth and the labor market could still be considered in balance with the unemployment rate holding steady because of changes in immigration.
Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said Friday's weak payrolls may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor.
"If those numbers come in hotter than expected, a cooler labor market may not be enough to quiet the calls for hikes inside the Fed, or lower expectations outside of it," Zentner said.
Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.