July jobs report takeaways: Weakening labor market, recession fears

The Herald Scotland

5 days ago

By late afternoon Aug. 1, Trump announced he ordered the firing of Erika McEntarfer, the U.S. commissioner of Labor Statistics. The president in a social media post accused McEntarfer of manipulating figures for "political purposes," though he did not provide any evidence.
In early afternoon trading, the Dow Jones Industrial Average was down about 607 points and the benchmark S&P 500 index was off 1.5%
Over the past three months, the economy has averaged just 35,000 employment gains.
Here are a few takeaways:
This was no blip
The poor showing likely wasn't an outlier that will be followed by a resumption of healthy job gains in the months ahead, economists said. Consumers have reined in their spending somewhat, amid worries about Trump's tariffs pushing up prices, and are pulling back on travel and recreational activities. As more of the import charges hit store shelves, Americans will likely restrain their outlays further, Pantheon Macroeconomics wrote in a note to clients.
That should translate into weaker job gains, especially in sectors such as manufacturing, retail, trucking and warehousing, the research firm said.
And on July 31, Trump escalated his global trade fight with a sweeping new round of import levies.
Meanwhile, executives' confidence in the business outlook has been shaken in recent months by the tariffs - which are squeezing profit margins - and that's expected to spell a more pronounced decline in business investment, Pantheon said.
"Sadly, employment appears set for a further summer slowdown as firms, facing renewed cost volatility from escalating trade tensions, remain focused on managing labor costs through reduced hiring, performance-based layoffs, restrained wage growth, and lower entry-level wages," Gregory Daco, chief economist of EY-Parthenon, wrote to clients.
Also, after the Supreme Court recently lifted a stay on mass federal layoffs, "the decline in federal employment likely will gather more momentum over the coming months," Pantheon said.
The Labor Department has tracked 84,000 federal job losses this year, but the number of buyouts and job cuts announced was much larger.
Hiring across the economy hit a 12-month low in June, Labor Department figures show.
Will there be a recession in 2025?
The dreaded word has slipped back into the conversation after fading the past couple of months as Trump delayed many tariffs and reached deals with several countries.
"To me, today's jobs report is what entering a recession looks like," Josh Bivens, chief economist of the left-leaning Economic Policy Institute, said in a statement. "Could we pull up? Sure. But if we look back and end up dating an official recession that starts 3-6 months from now, this is what it would look like today - rapid softening/deterioration in the labor market."
A recession now appears "very, very likely" unless Trump lowers the tariffs by Labor Day, said Mark Zandi, chief economist of Moody's Analytics.
Could a skidding economy and stock market lead Trump to reverse course?
A darkening economic outlook and tumbling stock market could well prompt Trump to try to soften the import fees, Zandi said. "He's going to try to pull it back," he said.
But if he doesn't act before Labor Day, "It will be too late," Zandi said, adding the duties will start to ripple too dramatically into retail prices and consumer and business sentiment for the effects to be undone.
A September fed rate cut likely
At a July 30 news conference following the Fed's decision to hold rates steady for a fifth straight meeting, Fed Chair Jerome Powell described the labor market as solid and balanced. He also said officials would focus primarily on the unemployment rate as they decide whether to lower rates in September.
The jobless rate edged up to 4.2% in July. It's still historically low even as Trump's immigration constraints, particularly deportations, shrank the labor force - the pool of people working or looking for jobs. Still, employer demand for employees has waned.
But Morgan Stanley suggested the feeble job gains of the past three months would spur the Fed to act in September despite stable unemployment.
"The slower payroll pace keeps downside risks elevated and a September cut on the table," Morgan Stanley said in a research note.
Fed fund futures markets are now putting the chances of a September rate decrease at 85%, up from 45% after Powell's July 30 remarks.
AI is starting to crimp job gains
Professional and business services shed 14,000 jobs in July and payroll gains in the sprawling white-collar sector have been stagnant for more than two years. July's showing included job losses in computer and technical roles. Staffing executives say companies are replacing many entry-level information technology workers with artificial intelligence.
"It is happening," Goldman Sachs chief economist Jan Hatzius said on CNBC after the release of the July jobs report. "This is not the main thing driving the labor market... But we're seeing early signs."
(This story was updated to add new information)