What Small Businesses Need to Know About the July Jobs ReportUnemployment rose more than expected. Hiring slowed more than expected. Here's what that means for business owners.

The disappointing U.S. employment report for July unleashed a "Freakout Friday" moment in financial markets and triggered a wholesale resetting of expectations for how much the Federal Reserve might cut interest rates next month.

There was much to grimace about in the Bureau of Labor Statistics report card on the job market, including a jump in the unemployment rate to a post-pandemic high and the weakest pace of private-sector hiring in 16 months.

That said, the report was not without its bright spots like a second straight month of hefty workforce growth and came with some fat caveats, including a big debate underway about the weather.

Here are four reasons to take a breath and accept that the report may not signal the end is near.

BIG BAD BERYL

The BLS added a big footnote to the first page of Friday's release to say Hurricane Beryl - which slammed into Texas during the employment report survey week and left some 2.7 million homes and businesses in the Houston area without power for days - "had no discernible effect" on the month's data.

A number of economists said: "Whoa!"

For one thing, they said, just look at the number of people who reported not being at work due to bad weather: 436,000 nonfarm workers and 461,000 with agriculture workers included.

That is not just a record for the month of July, it was more than 10 times the July average dating back to 1976 when BLS started tracking the metric. And more than 1 million others could only work part time due to the weather, also a record for the month.

"We are not sure that we absolve Beryl of any responsibility for the weakness in this data," Jefferies U.S. economist Thomas Simons wrote.

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TEMPORARY LAYOFFS

The number of people who said their job loss was temporary was the highest in about three years last month and accounted for more than half of the overall increase in the number of unemployed of 352,000.

If their temporary layoffs last only a few weeks or don't become permanent, economists expect most of those people will report as employed in the report for August that will come out next month.

Again, Beryl may be a culprit here.

"We think some of those layoffs may have been related to Hurricane Beryl," Oxford Economics Lead U.S. Economist Nancy Vanden Houten wrote.

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CONSTRUCTION JOBS STILL HUMMING

Construction work, often a leading indicator of coming shifts in the economy, especially for sectors like home building, continued growing last month at roughly the pace of the last year.

The 25,000 new jobs was also somewhat above the roughly 20,000 construction jobs added on average each month of the five years prior to the pandemic, a period Fed officials often reminisce about.

That could augur for a recovery in housing starts, which have been sluggish for months.

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PRIME-AGED PRIME TIME

Economists keep close track of so-called "prime-aged workers" - those between 25 and 54 years old - because they account for such a big chunk of the U.S. workforce.

And those prime-agers are trundling back to the labor force in sizeable numbers.

The prime-aged labor force participation rate rose in July to 84%, the highest since 2001.

For prime-aged men, their rate ticked up to 90% - the first nine-handle since the 2007-2009 financial crisis.

And for prime-aged women, it was back to record territory. At 78.1% last month, the rate matched a record high first set in May.

Reuters Graphics

 The July jobs report was weaker than expected. For business owners, that could be a bad sign. 

U.S. employers added 114,000 jobs in July. Though payrolls are still growing overall, this marks quite a dip down from the downwardly-revised 179,000 added in June, according to the latest report from the U.S. Bureau of Labor Statistics. It also falls well below the previous 12 month's average of 215,000 jobs and the 175,000 jobs that economists predicted.

But the report brought another surprise: an uptick in unemployment at 4.3 percent in July (economists had predicted 4.1 percent). That's the highest since October 2021 and a notable shift, considering unemployment had remained below 4 percent for the 27 months prior to May.

"The unemployment rate is no longer drifting upward, but rather rising at a steady clip," said Nick Bunker, economic research director for North America for Indeed Hiring Lab, in an emailed statement. 

Wage growth also slowed in this report, increasing 0.2 percent month-over-month and 3.6 percent year-over-year, the lowest since May 2021.

Overall, the report "contradicts the Fed's description of the labor market as coming back into balance and normalizing," says Julia Pollak, chief economist at the job posting site ZipRecruiter. "It very much shows a labor market being knocked off balance by restrictive rates and deteriorating beyond what we saw in 2019 and 2018." 

In the small business community, a slowdown in the labor market is already evident.

In July, a net 15 percent of owners planned to create new jobs in the next three months, down from levels around a net 30 percent back in 2021, according to the latest jobs report from the National Federation of Independent Business. Plus, a net 18 percent of small-business owners planned to raise compensation in the next three months--a four point decline from June.

A "slackening" in the labor market might mean more available candidates, Pollak says--which could be a relief for business owners who have been struggling to find the right talent. But on the other hand, it could mean potential pullbacks in consumer spending as labor market earnings drive disposable income growth, she adds. 

"There's a very direct relationship between what people are getting in the labor market and what they're able to spend and pass on to businesses," Pollak says, so companies that are "sensitive" to consumer spending could feel the brunt. 

This report could also be a worrisome one for the Fed. On Wednesday, Fed Chair Jerome Powell shared that the long-awaited rate cut, the first in more than four years, could be "on the table" for September, but added that he "would not like to see material further cooling in the labor market."

With a report like this, the Fed's goal of a soft landing might be in peril, Bunker said: "The rise in the unemployment rate cannot be ignored as job gains have weakened and become less common. Something needs to change for the labor market to remain relatively healthy. It's not clear if that change can come in time."