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Meaningful jobs data revisions send shockwaves through

markets

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Revisions raise doubts on Fed's ability to gauge economic

trends

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Rate cut probabilities jump for the rest of 2025

By Davide Barbuscia

NEW YORK, Aug 1 (Reuters) - News of a surprise weakening

in the U.S. labor market last month jolted investors on Friday,

as hefty revisions to past months raised fears the Federal

Reserve may have been flying blind in recent months and may need

to play catch-up with interest rate cuts.

Nonfarm payrolls increased by 73,000 jobs in July after

rising by a downwardly revised 14,000 in June, the Labor

Department's Bureau of Labor Statistics said in its employment

report on Friday. Economists polled by Reuters had forecast

payrolls increasing by 110,000 jobs after rising by a previously

reported 147,000 in June.

The report comes two days after the U.S. central bank left

unchanged its benchmark interest rate and avoided signaling

imminent rate cuts, dialing back market expectations for an

easing at the next policy meeting in September.

That changed dramatically on Friday, with odds for a 25

basis point cut in September jumping to around 81% after the

data from 38% on Thursday, according to CME Group data.

"The Fed's job is becoming increasingly difficult based on

the deterioration of the economic data," said Matthew Miskin,

co-chief investment strategist at Manulife John Hancock

Investments. "These revisions are massive and really are a game

changer to the Fed's reaction function, and so I think this Fed

meeting is one that they'd like to revise."

Revisions for May and June came in well above the norm, the

Bureau of Labor Statistics said. It gave no reason for the

revised data but noted that "monthly revisions result from

additional reports received from businesses and government

agencies since the last published estimates and from the

recalculation of seasonal factors."

May's nonfarm payroll gain was slashed by 125,000, from

144,000 to just 19,000, while June's downward revision was by

133,000. In total, employment over the two months is now 258,000

lower than initially reported.

"It is painfully obvious that the U.S. government has an

improper model for payroll calculations," said Michael Green,

portfolio manager at Simplify Asset Management. "If you don't

have reliable data, you make bad policy."

Spencer Hakimian, founder of macro hedge fund Tolou Capital

Management, said layoffs across several government departments,

part of U.S. President Donald Trump's plans to reduce wasteful

government spending, have prompted him to rely more heavily on

alternative measures of economic strength than just government

data, such as credit card data, and data from Truflation, an

independent inflation index alternative to official government

inflation measures.

Fed Chair Jerome Powell said in a press conference on

Wednesday the labor market remained strong, and that the central

bank was still in the early stages of grasping how Trump's

overhaul of import taxes and other policy shifts would play out

for inflation, employment, and economic growth.

"Had those figures been the initial prints a month or two

ago it would have significantly changed the labor market

narrative over the entire summer," said Adam Hetts, global head

of multi-asset and portfolio manager at Janus Henderson

Investors, in a note.

Treasury yields, which move inversely to bond prices,

dropped after the data, with benchmark 10-year yields

down by a whopping 15 basis points in mid-morning

trade at 4.251% from about 4.4% before the data was published -

their biggest daily drop since April.

Two-year yields were down by about 20 basis

points to 3.753% from 3.951% earlier on Friday, registering

their biggest daily decline since August last year.

Stocks declined too, also weighed on by Trump's latest

tariffs salvo. The benchmark S&P 500 index . was down 1.5%

in late morning trade, bringing stocks to their lowest since

early July.

The deterioration in the labor picture comes amid steep U.S.

tariffs on large trade partners that - while not as high as

feared earlier this year - are still largely expected to worsen

inflation and slow economic activity.

"With job creation at stall-speed levels and the tariff

headwind lying ahead, there's a strong possibility of a negative

payroll print in the coming months which may conjure up fears of

a recession," said Jeff Schulze, head of economic and market

strategy at ClearBridge Investments.