The seemingly poor July US non-farm employment data, upon deeper analysis, reveals a more complex picture of the American economy.

Market commentary suggests that the employment report released last Friday initially shocked markets. However, the core significance of this report lies in prompting markets to reassess whether the US economy is undergoing a benign adjustment back to post-pandemic normalcy or showing signs of an impending recession.

While the reduction in government sector positions partially explains the employment data slowdown, the more critical signal is that employment growth in highly cyclical industries has almost completely stalled.

This series of data makes the Federal Reserve's dovish stance appear more prescient and has altered market expectations regarding monetary policy direction. Investors are closely monitoring corporate earnings performance, particularly the divergence across different sectors, to gauge the economy's true health and future trajectory.

**Cyclical Industry Employment Stagnation More Concerning**

Analysis indicates that a key component of the employment data slowdown is the reduction in federal, state, and local government positions. Data shows that over the past six months, new job creation in the US economy was only half that of the previous six months. Of this decline, up to 40% can be attributed to reduced government sector hiring.

Specifically, while private sector job creation has also slowed significantly, particularly with poor performance in June, market discussion of this employment report would not be as intense if government hiring decline were excluded.

The more noteworthy signal in the employment data is that cyclical industries have almost completely stopped adding new employees. This trend can be traced back to early this year, with July's report merely confirming this unsettling condition.

These highly cycle-sensitive industries serve as key indicators of economic health. This report itself has not changed this picture but has even reinforced market concerns about weakening underlying economic momentum. Compared to one-off government hiring fluctuations, the persistent weakness in cyclical industries better reflects endogenous growth pressures in the economy.

**Economic Slowdown or Return to Normalcy?**

Faced with the latest employment data, investors confront a core question: Is the US economy experiencing cyclical slowdown or a normalizing cooldown from post-pandemic irrational exuberance? Different answers to this question lead to vastly different market assessments.

On one hand, the absolute level of unemployment remains at historic lows, comparable to the economic boom periods of the late 1990s and mid-2000s. From this perspective, the current slowdown can be interpreted as a benign adjustment toward sustainable economic normalcy.

On the other hand, the direction of unemployment rate changes is concerning. Historical experience shows that once unemployment begins rising rapidly, this trend often continues, as demonstrated in 2000 and 2008. If focus is placed on the rate of change, then concerns about recession risk should intensify.

Analysis suggests that to determine which interpretation is closer to reality, corporate earnings performance serves as a key reference. Strategas' Don Rissmiller notes that unless corporate profits decline, the US economy would struggle to fall into recession. According to FactSet, current S&P 500 component earnings growth reaches 10% (with two-thirds of companies having reported), providing support for the benign "normalization" interpretation.

However, significant industry divergence lies beneath overall earnings growth. Analysis shows that the technology sector (benefiting from AI enthusiasm) and financial sector (benefiting from high interest rates, rising asset prices, and high volatility) are experiencing rapid profit growth. But in other industries such as consumer goods and raw materials, earnings growth is clearly slowing. This divergence precisely corroborates the weak employment data in cyclical industries, revealing that the US economy is not experiencing broad-based prosperity but rather structural hot-and-cold unevenness.