EB SECURITIES: Why was the US nonfarm payroll significantly revised downward?

EB Securities released a research report, stating that the non-farm data for May and June has been revised down by a cumulative 258,000 people. The addition of 73,000 jobs in July, compared to an average monthly increase of over 100,000 jobs in the first quarter, has significantly declined. Additionally, the unemployment rate has increased to 4.2% month-on-month, all indicating a weakening trend in US non-farm employment, with a high probability of the Federal Reserve restarting interest rate cuts in the second half of the year. CME Fedwatch tool indicates that the market expects the Federal Reserve to cut interest rates three times in 2025, with the first cut expected in September with over an 80% probability, followed by consecutive cuts in October and December with probabilities of 66.0% and 51.4% respectively. Key points from EB Securities: Event: On August 1, 2025, the US Department of Labor released the July non-farm data for 2025: 73,000 new non-farm jobs were added, lower than the expected 110,000, with the previous value revised from 147,000 to 14,000; the July unemployment rate was 4.2%, as expected, with the previous value at 4.1%; average hourly wages increased by 3.9% year-on-year, slightly higher than the expected 3.8%. How do we interpret the significant downward revision of the June non-farm data? On one hand, the monthly adjustment of non-farm data is a common practice. The major downward revision in June was mainly in government, leisure/hospitality, and construction employment data, totaling a downward revision of 90,000 people, accounting for nearly 70% of the downward revision in June non-farm data. These industries have historically had high prediction errors and are prone to significant fluctuations. On the other hand, the significant downward revision of the non-farm data reflects the disruption caused by tariffs to the US economy, which can lead to reduced accuracy in "birth-death model" predictions, resulting in an increased deviation between actual values and initial values obtained through model predictions. The significant downward revision of the June non-farm data reflects the disruption caused by tariffs to the US economy, and aligns with the view that the resilience of the US economy should not be overestimated. It is still highly likely that interest rates will be lowered. Objectively speaking, the cumulative downward revision of 258,000 people in the May and June non-farm data, along with the addition of 73,000 jobs in July compared to the average monthly addition of over 100,000 jobs in the first quarter, as well as the increase in the unemployment rate to 4.2%, all point to a weakening trend in US non-farm employment, with a high probability of the Federal Reserve restarting interest rate cuts in the second half of the year. Lower-than-expected addition of non-farm jobs, financial activities, education/healthcare, and retail industries show stability: 1. Service industries such as financial activities, education/healthcare, and retail added 15,000, 79,000, and 16,000 jobs respectively in July, higher than the previous values of -0.2, 52,000, and -14,000, indicating relatively stable demand in the service sector. 2. Manufacturing: Job additions in manufacturing have been negative for three consecutive months, reflecting a lack of willingness by businesses to increase production. Labor force participation rate has declined, unemployment rate has risen: In July 2025, the labor force participation rate was recorded at 62.2%, lower than the previous value of 62.3%, indicating a significant weakening in the job-seeking intentions of the middle-aged and younger population. In terms of the unemployed population, there was an increase of 221,000 people in July, driving the U3 unemployment rate (unemployed individuals/labor force) to rise to 4.2%. In terms of structure, the temporarily unemployed population (increased by 80,000 people, compared to a decrease of 14,000 people in the previous month), permanent unemployed population (no change, compared to a decrease of 29,000 people in the previous month), and those completing temporary work (increased by 31,000 people, compared to a decrease of 122,000 people in the previous month) have all increased, indicating that businesses are starting to increase layoffs. The significant downward revision of the June non-farm data reflects the disruption caused by tariffs to the US economy, and it is highly likely that interest rates will be lowered. Objectively speaking, the cumulative downward revision of 258,000 people in the May and June non-farm data, along with the addition of 73,000 jobs in July compared to the average monthly addition of over 100,000 jobs in the first quarter, as well as the increase in the unemployment rate to 4.2%, all point to a weakening trend in US non-farm employment, with a high probability of the Federal Reserve restarting interest rate cuts in the second half of the year. CME Fedwatch tool indicates that the market expects the Federal Reserve to cut interest rates three times in 2025, with the first cut expected in September with over an 80% probability, followed by consecutive cuts in October and December with probabilities of 66.0% and 51.4% respectively. Risk factors: Unexpected economic downturn in the US; unexpected evolution of trade and geopolitical situations.