Payrolls Are Shrinking While Layoffs Stay Rare. The Fed Has to Reconcile Both

by Alina Castellanos · August 13, 2026

Economics Correspondent, US Market Current

The American labour market is currently telling two stories that do not obviously fit together, and the Federal Reserve has to price both of them. On the establishment side, employment is going backwards: the Bureau of Labor Statistics reported that nonfarm payrolls fell by 23,000 in July on a seasonally adjusted basis. On the insurance side, very few people are being laid off: the Labor Department reported Thursday morning that seasonally adjusted initial claims rose to 209,000 in the week ended August 8, while the four-week moving average held at 199,000 and the number of people still drawing benefits fell. The July producer price index landed the same morning.

The July employment report, published by the BLS, is the more alarming of the two data streams. Alongside the 23,000 decline in payrolls, the unemployment rate held at 4.1 percent and the labour force participation rate stood at 61.4 percent, which the BLS noted was down 0.7 percentage point since January. Average hourly earnings for all employees on private nonfarm payrolls, at $37.62, were little changed on the month, up two cents, and have increased 3.2 percent over the year — a pace that no longer looks like the wage-driven inflation problem some on the committee worried about a year ago.

The sector detail explains a good deal of the headline. Local government education shed 50,000 positions, retail trade lost 19,000 and financial activities lost 14,000, according to the BLS. Health care, which has carried the payroll count through much of this expansion, added 22,000. Manufacturing, construction, information and professional services showed little change. Strip out the education swing and the picture is less a broad contraction than a narrow one concentrated in a handful of industries — but that is a distinction the committee will have to argue about rather than assume.

The revisions matter as much as the headline. The BLS marked May down by 66,000, to a gain of 63,000 from a previously reported 129,000, and cut June by 37,000, to a gain of 20,000 from 57,000. Taken together, that is a materially weaker second quarter than the one policymakers thought they were looking at when they met at the end of July. It also means the run of monthly prints the committee used to justify holding rates steady was, in hindsight, describing a slower economy than the one on the page at the time.

Set against that, the claims data has stayed low, even though it moved the wrong way this week. In Thursday's release the Labor Department reported seasonally adjusted initial claims of 209,000 for the week ended August 8, an increase of 9,000 from the prior week's revised level; the previous week was revised up by 1,000, to 200,000 from 199,000. The four-week moving average was 199,000, unchanged from the prior week's revised average. Continuing claims — the count of people still drawing benefits — fell 22,000 to 1,777,000 for the week ended August 1, and the insured unemployment rate was 1.2 percent. On an unadjusted basis, initial claims totalled 186,909. The 209,000 figure came in above the 202,000 consensus carried on the XTB economic calendar.

The standard reconciliation of the two series is that employers have stopped hiring without starting to fire. Claims measure separations; they say nothing about whether a company is filling the vacancy left by someone who quits. A labour market where firms hold onto the staff they have but decline to add headcount can produce flat or negative payroll growth and low claims simultaneously. Thursday's figures do not resolve which way that is breaking. New filings rose on the week and overshot expectations, which is what the early stage of a layoff cycle would look like; the count of people still drawing benefits fell by 22,000, which is not. One week in either direction sits inside the noise, and the four-week average did not move at all.

This is precisely the ambiguity that split the Federal Open Market Committee last month. The Fed held its target range at 3.5 to 3.75 percent on July 29 in a 9-3 vote, with Cleveland's Beth Hammack, Minneapolis' Neel Kashkari and Dallas' Lorie Logan all dissenting in favour of a quarter-point increase, as Forbes reported. In her published statement on the vote, Hammack was explicit that she reads the labour market as strong enough to take the strain. "Given the stability of the labor market, with the unemployment rate near my estimate of maximum employment, I view high inflation as the more pressing problem," she wrote. That judgement was made before the July payroll decline was published.

Rate markets have been moving on the labour data rather than the inflation data. Benzinga reported that the futures-implied probability of a September increase stood at 45 percent ahead of Wednesday's consumer price release, which showed headline CPI up 0.1 percent on the month and 3.4 percent over the year, with core at 0.2 percent and 2.5 percent. An in-line inflation print did not settle anything; it left the labour market as the swing variable, and the labour market is currently sending mixed signals by design.

The near-term calendar has begun to fill in. The July producer price index arrived at 8:30 a.m. ET Thursday alongside the claims report, and it cut two ways. Final demand was unchanged on the month, seasonally adjusted, against a consensus of a 0.2 percent rise, and was up 4.7 percent for the twelve months ended in July, down from 5.5 percent in June. Underneath, the measure that strips out foods, energy and trade services rose 0.4 percent on the month after inching up 0.1 percent in June, and advanced 4.7 percent over twelve months. The flat headline came from a 3.1 percent drop in final demand energy and a 0.9 percent drop in foods; the core reading accelerated. Hammack was due to speak at 8:15 a.m. ET and Richmond's Thomas Barkin at 8:40 a.m. ET, according to the XTB economic calendar, though no account of either set of remarks had been reported at publication, and the minutes of the July 28-29 meeting are due on August 19 at 2:00 p.m. ET.

Equities go into Thursday's session — which has not yet opened — with modest gains behind them. The S&P 500 closed Wednesday at 7,748.50, up 0.26 percent, the Nasdaq Composite at 26,588.49, up 0.54 percent, the Dow at 53,770.27, down 0.04 percent, and the Russell 2000 at 3,045.49, up 0.61 percent, according to a Thursday morning preview from Regal Discount Securities.

What the minutes are most likely to clarify is not whether the committee is close to hiking, but which labour market it thinks it is looking at. If the majority reads the payroll weakness as the leading indicator and claims as the lagging one, the case for tightening into a contracting jobs count is hard to make. If it reads claims and the 4.1 percent unemployment rate as the truer signal and payrolls as noisy and revision-prone, the hawkish bloc's argument survives. Both readings are defensible on the data now published, which is why three Reserve Bank presidents were willing to dissent over it — and Thursday's producer price report, soft at the headline and firmer at the core, does not make the argument any easier to settle.