By Lucia Mutikani
WASHINGTON (Reuters) -U.S. job growth likely slowed in July, with the unemployment rate forecast rising back to 4.2%, but that probably would be insufficient to spur the Federal Reserve to resume cutting interest rates soon as tariffs are starting to fan inflation.
The anticipated slowdown in nonfarm payrolls in the Labor Department's closely watched employment report on Friday would mostly be payback after a surprise surge in state and local government education boosted employment gains
in June.
The U.S. central bank on Wednesday left its benchmark interest rate in the 4.25%-4.50% range. Fed Chair Jerome Powell's comments after the decision undercut confidence the central bank would resume policy easing in September as had been widely anticipated by financial markets and some economists.
Though Powell described the labor market as being in balance because of supply and demand both declining at the same time, he acknowledged that this dynamic was "suggestive of downside risk." Job growth has slowed amid uncertainty over where President Donald Trump's tariff levels will eventually settle.
Trump on Thursday slapped dozens of trading partners with steep tariffs ahead of a Friday trade deal deadline, including a 35% duty on many goods from Canada.
The White House's immigration crackdown has reduced labor supply as has an acceleration of baby boomer retirements.
"We just don't have a roadmap yet with respect to tariffs, and now that it's coming into place, I think that can certainly help, but if you're thinking about what you're planning for your business over the next two to three years ... you don't want to make that decision until you know what your costs of running your business are going to be," said Michael Reid, senior U.S. economist at RBC Capital Markets.
Nonfarm payrolls likely increased by 110,000 jobs last month after rising by 147,000 in June, a Reuters survey of economists showed. That reading would be below the three-month average gain of 150,000. Estimates ranged from no jobs added to an increase of 176,000 positions. An economist predicting no change in payrolls pointed to the jump in state and local government education jobs in June, which accounted for nearly half of the employment gains that month.
"When the academic year ends, there is a huge drop in payroll levels at schools," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "The fact that there were fewer reductions than usual in June suggests to me that more of the usual wave of reductions came in July."
Stanley also argued that there had been a torrent of anecdotal and survey evidence suggesting that businesses large and small slowed their hiring activity this summer in the face of elevated policy uncertainty. This led Stanley to anticipate private sector payrolls growth slowed further in July rather than accelerated as most economists expected after the economy added the fewest jobs in eight months in June.
LOW BREAK-EVEN NUMBER
Federal government job losses as the Trump administration wields the axe on headcount and spending, excluding immigration enforcement, could mount after the Supreme Court gave the White House the green light for mass firings.
But the administration has also said several agencies were not planning to proceed with layoffs.
The reduction in immigration flows means the economy now needs to create roughly 100,000 jobs per month or less to keep up with growth in the working age population. The decline in the unemployment rate to 4.1% in June was in part due to people dropping out of the labor force. July's anticipated rise would still leave the jobless rate in the narrow 4.0%-4.2% range that has prevailed since May 2024.
"The July jobs report is unlikely to shake the Fed out of its 'wait-and-see' posture," said Gregory Daco, chief economist at EY-Parthenon. "But it will add further evidence that the labor market is gradually losing momentum."
Financial markets have pushed back an anticipated September rate cut to October. With tariffs starting to raise inflation, some economists believe the window for the Fed resuming policy easing this year is closing.
But others still believe the Fed could still cut rates in September, especially if the Bureau of Labor Statistics' preliminary payrolls benchmark revision in September projects a sharp decline in the employment level from April 2024 through March this year.
The Quarterly Census of Employment and Wages, derived from reports by employers to the state unemployment insurance programs, has indicated a much slower pace of job growth between April 2024 and December 2024 than payrolls have suggested.
"If it's an ugly downward revision, the Fed will move, there is no question," said Brian Bethune, an economics professor at Boston College.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
