July Jobs Report: Labor Market Weakens

Forbes

4 days ago

T
he Labor Department's jobs report for July shows several signs of a weakening job market.
Payroll growth dropped to 73,000, all of which was driven by health care and social assistance; in all other sectors, employment was flat. Even more importantly, the healthy payroll growth we had observed in May and June was drastically revised downward - from 144,000 to 19,000 in May and from 147,000 to 14,000 in June. The labor market has been much cooler than we realized in those months.
The household survey numbers were also quite disappointing. The unemployment rate ticked up modestly to 4.2%. But labor force participation declined to 62.2% - it has now dropped by .5 percentage points over the year. The employment rate out of the population similarly declined to 59.6%. The numbers of job losers, long-term unemployed and especially new entrants who are unemployed all rose - indicating a labor market where jobseekers are struggling and job loss is beginning to rise.
How can we make sense of these numbers? The economy has been jolted by a series of policies from the Trump administration over the past 6 months - tariffs, immigrant deportations, DOGE cuts to government employees (and those with govt contracts), and tax cuts. These policies all move in very different directions - while tax cuts should stimulate the economy, tariffs will likely reduce the demand for goods and workers (as will DOGE cuts) while immigration cuts will weaken worker participation and supply.
Employer uncertainty over the direction of the economy had already reduced employment growth (outside of health care); the new data will likely further increase their reluctance to hire. While economists had previously thought that the labor market was quite resilient, the large downward revisions in payroll growth for the two previouys months cast doubt on this view. Employment drops in manufacturing (likely hurt by tariffs that make imported parts more expensive and retaliatory tariffs on our exports), professional services (as research grants and contracts are frozen) and in federal government employment plus very weak growth in leisure and hospitality (as immigrants become more scarce) all reflect policy impacts.
And there is little reason to think that any of this will soon change. President Trump has imposed a raft of new tariffs today, a deadline which he has set for other countries to cut deals with the US; there is great uncertainty about the extent to which these tariffs will stick, though even where deals are being reached (with Japan and the EU), 15% tariffs are being imposed. Immigrants will continue to leave the labor market and perhaps the ccountry, making it harder to hire in key sectors; and cuts in employment to federal employees and contractors will continue. The declining job vacancy rate (4.4%) that we observed earlier this week will likely continue falling.
What interest rates decline as a result? Yes, rates will likely decline in the bond market, as traders will expect future declines in response to economic weakness. Pressure will rise on the Federal Reserve to cut interest rates, though it will do so with very reluctantly - as tariffs will also modestly raise inflation rates over the coming months. The rise in the PCE inflation rate yesterday, to 2.8% over the past year (excluding food and energy), is a portent of price increases to come.
Of course, it is always a mistake to put too much weight on any one month's numbers, and the same is true today. But the weak report today, combined with huge downward revisions for the two previous months, suggest we are entering a period of sluggishness in the job market, will which likely continue for some time to come.